Prudent investors will turn to gold and silver as the only true safe haven - Levenstein
In a spectacular display of solidarity, members of the G-20 vow to solve the problems of the Eurozone in a few more days, but will this be achieved and what will happen to gold?
Posted: Tuesday , 18 Oct 2011
After another meeting of finance ministers and central bankers of the G-20 major economies, European leaders have until this Sunday's (October 23) summit of the 27 EU leaders, their sixth attempt this year to resolve the Eurozone debt crisis.
Finance ministers and central bankers of the Group of 20 major economies who met over the weekend said they expected an October 23 European Union summit to "decisively address the current challenges through a comprehensive plan".
French Finance Minister Francois Baroin, who chaired the meeting, said Berlin and Paris, the leading Eurozone powers, were well on the way to agreeing a plan to reduce Greece's debt, stop contagion and protect Europe's banks.
The strategy proposed will involve plans to recapitalize banks, make Greek's debt mountain more sustainable and ramp up the firepower of the bloc's rescue fund.
British finance minister George Osborne told reporters his continental Eurozone colleagues "will have left Paris under no misunderstanding that there is a huge amount of pressure on them to deliver a solution to the crisis".
Treasury Secretary Timothy Geithner told reporters he was encouraged that the latest EU moves toward an overall strategy to tackle the two-year-old crisis contained the right elements, notably a recapitalization of European banks. Geithner said the IMF already had very substantial financial firepower and Washington would support committing more of the existing resources to supplement a well-designed European strategy with more euro zone funding.
Financial leaders of the Eurozone have also agreed to "strengthen the EFSF (bailout fund) in order to address contagion". EU officials said the most likely option was to use the 440 billion euro fund to offer partial loss insurance to buyers of stressed member states' bonds in a bid to stabilize the market.
German Finance Minister Wolfgang Schaeuble said, "Our G20 partners welcomed that the representatives of the euro zone have kept their word: the decisions on strengthening the EFSF have passed through parliaments in all member states."
"We will solve the problems in the euro zone in the same way. We are determined to present further decisions in Cannes."
"We will make sure that European banks have a sufficient amount of capital. We will find solutions for Greece. We will start initiatives to improve governance in the euro zone and this will contain changes in EU treaties."
In the meantime ECB President Jean-Claude Trichet said. "As regards our SMP (Securities Markets Program), as you know, as with all other non-standard measures, they are designed to be commensurate with distortion of markets and in order to help restore a better transmission of our monetary policy. The SMP decision has been taken by the governing council of the ECB on the basis of the understanding that the 17 heads of states had decided on 21 of July to have an EFSF which will be able to intervene on the secondary market in order to restore financial stability in the euro are."
"Our working assumption is that when we have, thanks to the new flexible EFSF, financial stability, we do not have to help restore a better transmission of monetary policy."
With regard to the Eurozone crisis EU Economic Affairs Commissioner Oli Rehn said. "In order to break the vicious circle ... we put last week on the table a comprehensive plan, a road map. I am pleased to say this plan received a warm welcome from our G20 partners."
"We need to maximise the effective lending capacity of the EFSF to expand its firepower. It's a work in progress." He also said. "We need to have to have a solution which is indeed lasting and durable and will facilitate the recovery of Greece and the servicing of the Greek debt.
"We will certainly work on the basis of the July 21 agreement and will likely do some technical revision due to change in market circumstances. This is now a work in progress. So we are not reopening the deal, we're rather revisiting the deal."
Recently Spanish and Italian borrowing costs were driven so high that the European Central Bank had to intervene in August in order to buy those countries' bonds and force yields down. And, only last week Standard & Poor's cut Spain's credit rating for the third time in three years as slowing growth and rising defaults threaten banks and undermine efforts to contain the sovereign-debt crisis in the Eurozone. The ranking was reduced by one level to AA-, S&P's fourth- highest investment grade, with the outlook remaining negative, the rating company said in a statement. Fitch Ratings downgraded Spain to the same level on Oct. 7, when the company also cut its rating on Italy.
In another sign of stress on European banks, UBS AG, Lloyds Banking Group Plc, and Royal Bank of Scotland Plc. had their long-term issuer default grades cut by Fitch Ratings, which put more than a dozen other lenders on watch negative as part of a global review.
Only a week ago, Fitch downgraded Italy's creditworthiness from AA- to A+. And the move came after Moody's Investors Service downgraded Italy's bond ratings to A2 with a negative outlook from Aa2
No matter what the political rhetoric, the Eurozone is in a mess, and It seems that no one really knows what the impact on the European banking system will be if Greek bondholders are asked to write off the correct loss of their bonds. But, the impact would certainly be felt on US banks as well. While there is no specific figure, it seems that it would require more than $2 trillion to save Europe. No wonder the leading finance ministers of the world's leading economies are now asking the International Monetary Fund to play a bigger role in fighting the Eurozone's escalating debt troubles as Europe cannot afford to bail out Spain or Italy should they run out of money.
While policymakers hope to stabilize the Eurozone bond market by using the EFSF to offer partial loss insurance to investors buying new Spanish or Italian bonds, the debt crisis in this region is far from being resolved.
Over the weekend cities all over the world saw protests as tens of thousands of individuals got together to denounce capitalism, inequality and the economic crisis. Whatever, their complaint, the fact remains that there are very serious problems in our financial and monetary system and as the world's financial leaders apply the same remedy time and time again without any success, things are only going to get worse.
The main driving force behind gold prices will not be the short-term speculative demand, but will be the demand emanating from long-term buying interests seeking risk protection for their savings due to depreciating worldwide currencies. And while, some may still turn to the US dollar and US Treasuries for the moment, most prudent investors will eventually turn to gold and silver as the only true safe haven for their savings.
Gold prices continue to consolidate with an upward bias. A decisive break above $1700 an ounce would suggest that some of the upward momentum has returned to the market.
About the author: David Levenstein 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. He has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali. For more information go to: www.lakeshoretrading.co.za