The euro was under much pressure last week as concerns of Greece resurfaced. Eurostat revised the Greek deficit to 13.6 of GDP last year, up from prior estimate of 12.9% and nearly double the figure of 2008. A few hours later, another blow came from Moody’s which cut Greece’s sovereign debt rating a notch from A2 to A3, just four grades above junk, warning that the country would likely pay a high cost to stabilise its debt and could face a new downgrade. The euro tumbled to 1.3261 dollars, its lowest point in almost a year, before recovering slightly.

The setbacks came as the government was busy brokering the terms of a bailout loan from the European Union and the International Monetary Fund to avert a possible debt payment default. The deepening Greek crisis in turn upped the pressure on other weaker eurozone member states such as Ireland, Spain and Portugal, all facing similar problems whose dangers were highlighted by an IMF warning on Wednesday.

EU figures meanwhile showed that public finances across Europe were in a dismal state after governments spent heavily to keep their economies afloat. The combined deficit for all 16 eurozone countries more than trebled in 2009 to 6.3 percent of Gross Domestic Product (GDP) from 2.0 percent in 2008, more than twice the level permitted under EU budget rules.

Ireland was the worst offender, with a deficit at 14.1 percent, followed by Greece, Spain on 11.1 percent and Portugal with 9.4 percent.

The IMF warned on Wednesday that the Greek crisis could spill over to other member states. “In the near term, the main risk is that, if unchecked, market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown sovereign debt crisis, leading to some contagion,” the IMF said.

Another problem concerning Greece is that while all this political wrangling continues and with no restraints on capital flows within the European Union, Greek savers are free to transfer their assets elsewhere, and it’s possible that a portion of the Greek deposit withdrawals were reinvested into gold which has helped drive the price of the yellow metal to its recent all time high in euros. The fact remains that if the Greek government cannot stem the outflows of deposits soon the current crisis will only worsen and the spiral from financial crisis to sovereign debt crisis to banking crisis will spread to other European countries suffering from similar fiscal imbalances. With Spain and Portugal next in line with their own sovereign debt issues, we can expect depositors in these countries to make similar runs to the bank for their cash

Gold has often been called the “crisis commodity” because it tends to outperform other investments during periods of world tensions. The very same factors that cause other investments to suffer cause the price of gold to rise. A bad economy can sink poorly run banks. Bad banks can sink an entire economy. And, perhaps most importantly to the rest of the world, the integration of the global economy has made it possible for banking and economic failures to destabilize the world economy. As banking crises occur, the public begins to distrust paper assets and turns to gold for a safe haven. When all else fails, governments rescue themselves with the printing press, making their currency worth less and gold worth more. Gold has always risen when confidence in government is at its lowest. Isn’t this exactly what we are witnessing in Greece?

The Dollar index surged to as high as 82.07 earlier on Friday but this rebound has been driven primarily by the weakness in Euro which in turn casts some doubt on the underlying strength of dollar. What is interesting is that since December 2009, the US dollar has gained nearly 11% value, yet the gold price has remained firm, trading near it’s all time historical highs of USD1225. But, it has made new highs in Euros, Sterling, Swiss Francs, and now the price of gold in Chinese Yuan and Russian Rubble is moving close to it’ all time high.  Who says gold is not a global currency?

Despite the fact that bullion pays no income and, after storage costs, can be seen to have a negative yield, it has been one of the best asset classes of the last decade delivering much better returns than equities and financials.

Russia has added another 500,000 ounces to its reserves which are now 21.3 million ounces. And, in their 2009 annual report the Canadian Mint published sales figures for their Gold Maple Leaf coins which increased 38% to 1,169,000 ounces from 848,000 ounces in 2008.

I have no doubt that gold will break to the upside shortly and resume its upward move. With escalating global sovereign debt on the horizon, the major currencies are due to weaken which is positive for gold. But, in addition, and even though the prices of gold and oil don’t exactly mirror one another, there is no question that oil prices do affect gold prices. If oil prices rise or fall sharply, investors can expect a corresponding reaction in gold prices, often with a lag. I expect to see the price of oil trade back at US$100/barrel within 9 months.

TECHNICAL ANALYSIS

 

Even though gold remains range bound and stuck between US$1080 and US$1160, it ended last week on a very positive note. The primary upward trend still remains firmly in tact, the medium indicators are turning positive and the close ended with a bullish engulfing pattern.                                                

About the author

David Levenstein is an expert on investing in precious metals .He brings over 30 years experience in futures, equities, forex and bullion. David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.  For more information go to: www.lakeshoretrading.co.za