The price of gold pushed through and held above the key resistance level of $1700 an ounce last week, as the US dollar dropped sharply due to the euphoria from Europe about the agreement made at the Euro Summit in Brussels. No one was more excited about the outcome than French president, Nicolas Sarkozy, who seems determined to save the world.
With regard to the recent summit in Brussels the key issues agreed on were, that the euro currency remains at the core of the European project of peace, stability and prosperity. The leaders also outlined certain steps that have to be taken in order to solidify the economic union. And, commensurate with the monetary union, they agreed on certain key issues.
They all agreed that the Greece’s debt to GDP ratio with should decline to 120% by 2020. They also agreed that the European Financial Stability Facility (EFSF) resources can be leveraged. The leverage could be up to 4 or 5, which is expected to yield around 1 trillion euro (around 1.4 trillion dollar).
It was also agreed that it was necessary to raise confidence in the banking sector by (i) facilitating access to term-funding through a coordinated approach at EU level and (ii) the increase in the capital position of banks to 9% of Core Tier 1 by the end of June 2012.
The agreement also included a deal between Eurozone leaders and banks to force private investors to take a 50% loss or “haircut”, slicing 100 billion euros off the 350-billion-euro debt pile hampering Greece.
There was also an unequivocal commitment to ensure fiscal discipline and accelerate structural reforms for growth and employment.
As far as I am concerned the deal clinched in Brussels offers nothing but a short-term reprieve and is unlikely to be enough to stop the crisis from spreading in the long run. Now, governments can’t even afford to service their own debts without having to resort to trickery such as suspending “mark-to-market” accounting rules and printing more money to buy their own bonds (effectively a Ponzi scheme). Frankly, all they are doing is perpetuating the chaos that is already occurring in the currency markets.
According to Jim Rogers, a world-renown commodity advisor, who has been consistently correct about precious metals since the beginning of the bull market in 2001. “Politicians have delayed addressing the problem yet again.” “It will come back in a few weeks or a few months and the world will still have the same problem, but this time only worse because the European Central Bank and other countries will be in deeper in debt.”
Rogers reiterated that widespread haircuts across Europe are necessary to truly resolve the crisis. “Greece is bankrupt, but others are too, and these haircuts will have to come back and be wider,” he says, adding that this morning’s global stock market rally had the potential to last for a while.
“There has been a major overhang, so we will see the easing of some pressure, but the problem will come back because the Western world still has not dealt with its debt,” says Rogers.
“Most European countries are increasing their debt rather than decreasing their debt. Until that changes, the problems are going to continue, just as they will in the U.S.,” he added.
Even though global markets surged after the summit deal was announced, contagion in Spain and Italy remain a real risk. Italy’s debt alone is €1.8 trillion which in itself is larger than the €1 trillion bailout fund. And, their 10 year bond has risen to close to 6% in recent days.
The deal “has the merit of validating a European framework, not to resolve the debt crisis, but at least reassures and (tries) to convince markets of Europe’s collective will,” said Barclays Bourse analyst Frankin Pichard.
The crisis that started in Greece two years ago has successively hit Ireland and Portugal and threatened to spill over to the euro area’s third and fourth economies, Italy and Spain.
“The next meeting on November 3-4 (at the G20 summit in Cannes) should provide more details on how the new formula EFSF will function,” said Pichard.
“We’re also waiting for further indications on states’ credibility, notably Italy and France, concerning their ability to reduce their budget deficits. Chaos has been distanced but the path is still long before crying victory.”
The head of the European bailout fund Klaus Regling said that he expects the Eurozone’s economic problems will last two to three years, and long-term issues will remain. Regling’s remarks suggest Europe still faces a long road to recovery from its sovereign-debt crisis.
“I think the European problems will be well-tackled and overcome over the next two to three years,” Dow Jones quoted Regling as saying during a talk at Beijing’s Tsinghua University.
“But it does not mean that all problems in this world will have disappeared,” the chief executive of the European Financial Stability Facility (EFSF) said.
Longer-term challenges include: a “big structure shift in financial markets” caused by the damaged appeal of sovereign debt among investors, and boosting competitiveness in some countries, Regling said.
“Sovereign debt, which for decades or centuries was the predominant risk-free asset, may be losing that status, not only in Europe but also in other countries,” he said.
Far from gold being in a bubble, the real bubble is the Eurozone, US and global debt bubble which is unravelling right in front of us. And, as central bankers try to manipulate the markets in attempt to escape the inevitable, the outcome will be a massive financial collapse just as Ludwig von Mises once stated:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
Japan intervened in the currency market on Monday morning for the third time this year, sending the U.S. dollar and the euro climbing sharply against the currency. The intervention came after the dollar touched a record low of 75.31 yen and pushed the world’s main reserve currency up past 79 yen within two hours.
“We started currency intervention this morning in order to take every measure against speculative and disorderly moves and to prevent risks to the Japanese economy from materializing,” Prime Minister Yoshihiko Noda told parliament.
Noda, who took over as Japan’s sixth premier in five years last month, served as finance minister in the previous cabinet and led three past interventions between September 2010 and August, including joint action with G7 partners in March 2011. The September 2010 intervention was Japan’s first in six years.
Azumi said that while Japan acted solo on Monday, he remained in close contact with his international counterparts.
As central banks print more money to pay, the outcome is going to be a further depreciation of the major currencies, an escalation in global currency wars, increased capital controls, exchange controls, tariff hikes etc. All of this action is going to cause more volatility and uncertainty in global financial markets as well as an increasing loss of confidence in fiat currencies. And, as this happens, more individuals will turn to gold and silver to protect their wealth. Gold has always been the oldest form of sound money. It has endured countless economic collapses and has retained its purchasing power through the decades. On the other hand, every single fiat currency has ended in failure.
Both the FOMC and the ECB meet this week, and neither is expected to make changes to short-term interest rates. FOMC members Tarullo, Yellen, and Dudley made dovish comments a week ago which suggested that QE3 was a possibility in the long-run but gave no indication that changes would be made at this week’s meeting. Given the 2.5% growth in US GDP reported last week, the Fed appears to have some breathing room.
The ECB had been expected to make a 25 bps rate cut several weeks ago. However, that may also be pushed back in the wake Thursday’s agreement on Greek debt and bank recapitalization. Some expectations now put the next ECB rate hike into December.
In the meantime, I remain extremely bullish on gold and urge investors to accumulate or add gold to their investment portfolios.
The recent break of $1700/oz (R) suggests that gold prices are gaining upward momentum and that a bottom of the correction was posted at $1600/oz. However, I would like to see prices remain above this level for at least another week before I declare this a decisive break.
David Levenstein is a long term expert on investing in precious metals. Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.
David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
For more information go to: www.lakeshoretrading.co.za