Gold prices continued to advance last week as more investors around the world gradually become more aware of the fragility of the current global financial system. The price of spot gold traded as high as $1763 an ounce before it slipped on Friday after the US non-farm payroll report showed a much larger than expected expansion in US job market in January 2012. Greece has still delayed its decision on whether to accept the terms of a new bailout for yet another day. Greece has already gone beyond the deadline for finalizing talks on the second Eurozone bailout and the International Monetary Fund financing package.
German Chancellor Merkel and French President Sarkozy proposed setting up a separate account for Greek debt payments to reassure creditors. Merkel said sequestering aid in such an account would give the Greek government guaranteed access to funds to finance its interest obligations. Sarkozy said it will “allow us to assure that the Greek debt is dealt with,” as both urged Greek leaders to agree to conditions set out by international creditors.
While financial leaders continue to struggle with the problems of Greece, it is now more than a week since the World Economic Forum Annual Meeting in Davos. At the meeting, the only thing all the financial leaders were able to agree on was that there is a global problem. However, and as to be expected, and although more than 2,600 of the world's richest, most powerful, influential or entrepreneurial people attended the meeting they were unable to agree on any solutions as to how to solve the problem. The managing director of the International Monetary Fund, Christine Lagarde, warned the Davos leaders that this was "not just a Eurozone crisis, it's a crisis that could have... spill over effects around the world". "What I have seen and what the IMF has seen in numbers and forecasts is that no country is immune and everybody has an interest in making sure that this crisis is resolved adequately," she said… what amazing revelations!
In the meantime, gold burst through the key psychological level of $1700 an ounce and has continued to trade above this level for more than a week. Spot gold gained more than 10% in January, its biggest monthly gain since August 2011. The price of the yellow metal has now broken above a key Fibonacci retracement level and the 100-day moving average. Gold rose above its 200-day MA last week.
The strong rally in gold prices was prompted by the US Federal Reserve that signalled that the interest rate environment would likely stay near zero for the next two years. After the latest Federal Open Market Committee (FOMC) meeting held on January 25, the Federal Reserve announced that the Committee decided to keep the target range for the federal funds rate at 0 to ¼% and currently anticipates that economic conditions - including low rates of resource utilization and a subdued outlook for inflation over the medium run - are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
The Committee was also of the opinion that inflation at the rate of 2% as measured by the annual change in the price index for personal consumption expenditures is most consistent over the longer run with the Federal Reserve's statutory mandate. In the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2% to 6.0%. It is not altogether surprising that the gold price spiked higher on the news of extending the zero-rate policy through 2014 as keeping rates low requires the Fed to print new money to buy Treasuries. As the dollar weakened against the euro, investors accumulated more gold positions as well as the physical metal based on the view that currency depreciation is likely to follow as global central banks are expected to use quantitative easing and accommodative monetary policies to create liquidity to stimulate the distressed economies.
Central banks around the world are printing money at an unprecedented rate. While they will use a series of new euphemisms in an attempt to fool the general public, the fact remains that, the balance sheets of these central banks are simply exploding. The term currently used for their expansionary monetary policies is quantitative easing (QE). But no matter what they will call it, the balance sheets of The US Federal Reserve, European Central Bank (ECB), Bank of Japan (BoJ), the Bank of England (BoE), the Bundesbank (Germany), the Banque de France, the People’s Bank of China (PBoC), and the Swiss National Bank (SNB) are all exploding. In fact the combined size of these eight central banks’ balance sheets has practically tripled in the last six years from $5.2 trillion to more than $15 trillion. And, it seems that they will continue to expand at an even faster pace over the next few years. The repercussions of this monetary policy will ultimately lead to the debasement of these currencies, much higher inflation and of course higher prices in gold and silver prices.
But, in addition to their expanding balance sheets, central banks have taken a more active involvement in the currency, commodity, equity and bond markets. This deliberate covert interference will not help stimulate economic growth or reduce the high levels of unemployment as we have already witnessed, and will only save the troubled financial institutions as well as falsely inflate the prices of certain asset classes. Ultimately, it will erode the purchasing power of money and destroy the savings of millions of middle class people. However, being prepared can help one avoid the prospect of being totally wiped out. And, one of the best ways to protect your wealth is by owning gold and silver.
While many individual investors get duped into believing that they will be saved by the actions of their central banks, countries such as China and Russia are not so gullible. Russia has been increasing their gold reserves each month, and while there are no accurate figures about the amount of gold held by the Chinese, I have no doubt that they are accumulating the precious metal and diversifying out of their dollar denominated holdings as quickly as possible.
The problem that they have is that since they are the largest foreign holders of US Treasuries, they cannot dump their holdings onto the market as this would dramatically push the value of these instruments lower. And, at the same time, I believe that they do not want to broadcast the fact that they are buying gold for fear of driving the price of gold much higher too soon. The Chinese government are also encouraging their citizens to buy physical gold. I also believe that this year we will also see a resurgence of demand out of India as well, and thus I urge investors to accumulate physical gold.
As I have stated many times in the past, it is important to build a core holding of gold bullion bars and gold bullion coins. Limited edition medallions, commemorative medallions and other medals are not bullion coins and should not be confused with gold bullion coins. Nor, should they be purchased instead of gold bullion coins. Do not be beguiled into believing that these limited edition medallions will become rare one day because a limited number of these medallions are being minted. A typical sales strategy of dealers who promote these medallions is to try and equate them with some rare coin that has been sold for an astronomical price. A limited edition medallion cannot be compared with an extremely rare coin and there is absolutely no guarantee that one day they will be in such huge demand due to the limited number minted. In all probability all they will be worth is the intrinsic value of the gold. So, it is much better to simply hold bullion coins.
Gold prices broke the $1700 an ounce level, and the upward momentum looks set to continue. The next level of resistance is $1750/oz. while $1700/oz. now looks to be a support level.
The price of silver has advanced more than 30% since it posted its’ low of $26.15 an ounce in December 2011 after correcting for several months. This move has outperformed most other asset classes, and in January this year it has posted gains of around 20%.
As I have frequently pointed out, the moves in silver can be rather spectacular and they always out-perform the moves we see in gold. It is also a much more volatile precious metal than gold, but for those investors who are willing to stay focused, I have no doubt that they will be rewarded many times over. But, as in the case of gold, the main purpose in wanting to invest in silver is not to make the massive speculative gains that we have seen over the years, but to diversify out of the more traditional investments of bonds and equities, and to protect and build wealth.
Silver is an excellent and affordable way to store value, but one must not expect to see these types of gains occur every single month. It is a long-term investment and should be an essential component in every diversified portfolio. It is an excellent hedge against inflation and currency devaluation. It is also one of the most affordable tangible assets around.
When buying silver, do not buy the overpriced limited edition medallions such as the Mandela/De Klerk or Mandela/Robben Island medallions as these are simply way overpriced items that have no investment value whatsoever. If you are a collector and for your own reasons want to own these items, then go ahead, but if you are a prudent investor stick to silver bullion bars and coins.
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Amid rioting in the streets of Athens, the Greek parliament finally approved the austerity package required in order to secure the EUR 130 billion second bailout from EU/IMF. Out of 300 lawmakers, a total of 199 voted in favour of the bill and 74 against. However, Greece still has to present the full details of the package on Wednesday at an extraordinary meeting of Eurozone finance ministers who must decide whether to approve the second aid package for Greece. The EU Economic and Monetary Affairs Commissioner Rehn said he's "confident" that Greece has done enough to ensure it receives the bailout. For the past two years, Greece has quarrelled with the Eurozone and the International Monetary Fund (IMF) about its’ financial dilemma and its apparent "rescue." Austerity measures have been agreed to, aid has been paid and private creditors have been forced to accept "voluntary" debt haircuts. Despite all this, Greece is in even worse shape today than it was then. Its economy is shrinking, the debt ratio is rising and the country and its banks have been cut off from capital markets.
Essentially, Greece is bankrupt and needs another bailout package to avoid a default. For weeks now, the Greek government has been negotiating with private creditors and the troika comprised of the IMF, European Union and European Central Bank (ECB) over a second bailout package. But, it is already clear that this aid package will not save the country and will only delay the inevitable---an insolvency.
Private bondholders who met in Paris discussed accepting an average coupon of as low as 3.6% on new 30-year bonds in a proposed debt swap. Such an agreement would slice 100 billion euros off more than 200 billion euros of privately-held debt and a formal offer must be made by Feb. 13 to allow all procedures to be completed before the March 20 bond comes due.
According to an article published by Reuters on Monday, Moody’s rating agency warned it may cut the triple-A ratings of France, the United Kingdom and Austria, and it downgraded six other European nations including Italy, Spain and Portugal, citing growing risks from Europe's debt crisis. Moody's, which said late last year it was reconsidering its European ratings, cut by one notch the ratings of Italy, Portugal, Slovakia, Slovenia and Malta and downgraded Spain by two notches. Moody's said the scope of the downgrades was limited due to "the European authorities' commitment to preserving the monetary union and implementing whatever reforms are needed to restore market confidence." The announcement came a day after Greece's parliament approved a deep new round of budget cuts in the hope of securing new bailout funds and avoiding a chaotic default in March. The rating outlooks of the nine countries affected by Moody's action was set to negative, "given the continuing uncertainty over financing conditions over the next few quarters and its corresponding impact on creditworthiness," Moody's said. Moody's move on Monday follows one by Standard & Poor's last month, when France and Austria lost their triple-A status, while Italy, Spain, Portugal, Cyprus, Malta, Slovakia and Slovenia were downgraded. S&P also cut the EFSF by one notch.
Also in January, rating agency Fitch downgraded the sovereign credit ratings of Belgium, Cyprus, Italy, Slovenia and Spain, indicating there was a 1-in-2 chance of further cuts in the next two year. Recently, Standard & Poor's (S&P) downgraded 34 of Italy's 37 banks, including UniCredit. However, the news went practically unnoticed as it was overshadowed by the problems in Greece.
As I have stated countless of times the European crisis is far from over. And, no amounts of bailouts or monetary stimulus will resolve the impending disaster. The entire European banking system continues to deteriorate month by month. Not only are most countries in this region bankrupt, so are many of their banks and financial institutions. But, to compound this global problem the real financial problems of the US are being ignored for the moment as Greece takes centre stage.
It is difficult to predict when the endgame will arrive, but when it happens and in order to avoid a series of defaults central banks will flood the system with money causing the value of global currencies to become worthless while pushing inflation sky high.
After some three years of injecting trillions into bank bailouts and stimulus, the US and most Western countries still have stagnant economic growth with high unemployment. The banks that have received “cheap” money have merely used the funds mostly for proprietary transactions. In the meantime, the central banks of the US, EU, UK and Japan have massively expanded balance sheets. Instead of using funds to stimulate real economic growth all the central banks have done is use their funding to save many financial institutions from collapsing, while creating “false” asset prices, giving the impression that their actions are having a positive effect on economic growth. Yet, despite the relative ineffectiveness of their monetary policies, these central banks continue with the same strategy, but merely find new names for their actions. While the major financial institutions will benefit in the short-term, these policies will cause a dislocation in the global currency markets which will lead to an intensification of the current currency war. We will also see continued levels of high employment in the major Western economies, further capital controls, and more social unrest.
Unless you believe that what I have written is merely a figment of my imagination, and that I have made up these scenarios, then it is essential to take precautionary measures to protect some of your wealth. And, one of the best ways to do this is to own some physical gold in the form of gold bullion coins and bars. The most popular gold bullion coins include Krugerrands, US Gold Eagles, the Canadian Maple Leaf, the Chinese Panda, Mexican Gold Pesos, and the Australian Kangaroo etc. Bullion bars come in many sizes. Gold bullion bars can weigh anything from a few grams upwards. Bars from 1 kg and 100 oz (~3kg) bars are sometimes accepted by participants in the professional bullion markets in Zurich and New York - though under strict controls to ensure bullion integrity. In London the market deals in the London Good Delivery (LGD) gold bullion bar. These gold bars are what most people think of as bullion. This London Good Delivery bar of bullion weighs 400 troy ounces - about 12.4 kilograms - and is about eleven inches long. It is stamped on the top (the bigger face) with the manufacturer's name, the weight, and the assayed purity. In South Africa, individuals are not allowed to own these 400 oz bars. In fact in a law that defies any sense of logic, the largest size gold bullion bar individuals are allowed to own is 100 grams. So, even if an investor wants to own say a kilo of gold, the investor cannot own an individual bar weighing one kilo, but can buy ten 100 gram bars or a medallion weighing one kilo. No matter what form of gold bullion you prefer, it is important to own some physical gold and not to confuse gold bullion items with limited edition medallions that have no investor value whatsoever.
Gold prices have built solid support above the $1700 an ounce level during the last two weeks. I believe that it will continue to trade above this level, and prices will soon re-test the next key resistance level of $1750 per ounce.
During the past week the price of silver has been hovering around the $34 an ounce level. When we look at the price move from its’ recent lows in December one must bear in mind that prices have moved more than 30%. So, a temporary period of consolidation at these levels would be perfectly acceptable.
Even if the price of silver trades up a few more dollars, it will still be incredibly undervalued. The supply of silver remains in a deficit which means the demand exceeds the amount produced. This deficit has been filled from sales of government stockpiles and sales of scrap. The thing is, there is nothing much available from any government.
For the first time in history, sales of both the US silver eagle as well as the Canadian Maple Leaf coin will surpass domestic silver production in the US and in Canada in 2011.
As of October 2011, the United States produced 923,000 kilos or 923 metric tons of silver.
The number will obviously change as revisions are made until the final total is known. Production of silver was down in the US by 15% when compared to the first ten months of 2010. At this rate, it is estimated that the US will produce around 35 million ounces of silver in 2011. However, this figure will be less than the 40 million American Silver Eagles minted for the year.
While investors buying physical silver are increasing in number, the number is still a fraction of the total investment community. Even though 40 million US Silver Eagles were sold in 2011, this accounts for one coin for every eight Americans!
Silver prices continue to hover around $34 an ounce after rising more than 30% since December last year. I believe that we will soon see a break to the upside that will propel prices to around $40/$42 an ounce.
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Finally after weeks of deliberating, Eurozone finance ministers agreed on a 130-billion-euro ($172 billion) bailout for Greece. After a marathon 13 hours of talks through the night, (I still don‟t understand why these officials have to work at night and not during the day), Eurozone finance ministers agreed on a rescue package with strict conditions.
Included in the bail-out package are measures to cut Greece's debt to around 120.5% of gross domestic product (GDP) by 2020. Greece will also have around 100 billion euros of debt written off as banks and insurers will swap bonds they hold for longer-dated securities that pay a lower coupon.
Private sector holders of Greek debt are expected to take losses of 53.5% or more on the nominal value of their bonds as part of a debt exchange that will reduce Greece's debts by around 100 billion euros. The vast majority of the funds in the 130-billion-euro program will be used to finance the bond swap and ensure Greece's banking system remains stable: 30 billion euros will go to "sweeteners" to get the private sector to sign up to the swap, 23 billion will go to recapitalize Greek banks. A further 35 billion will allow Greece to finance the buying back of the bonds, and 5.7 billion will go to paying off the interest accrued on the bonds being traded in.
While the deal with provide immediate relief to Athens and financial markets, it is certainly not going to help the economy. Since almost nothing will go directly to help the Greek economy, how is the country going to return to a path of sustainable economic growth? (Figures last week showed its economy shrank 7% year-on-year in the last quarter of 2011).
I remain extremely skeptical.
In the meantime, in their report Gold Demand Trends for the year 2011, the World Gold Council (WGC) reports that the global demand for gold grew by 0.4% last year to 4,067.1 tons. According to the report, in 2011 the annual value for gold demand was a record US$205.5 billion which was an increase of 29% above the 2010 value.
While global jewellery demand of 1962.9 tons was some 3% lower than the demand in 2010, investment demand grew by 5% to a record 1,640.7 tons. According the report, “demand for gold bars and coins remains healthy and growth in gold coins in particular was responsible for much of the year-on-year increase in Q4 investment. Bar demand was unable to sustain the elevated levels of Q4 2010, but nevertheless remained well above the 240.3 ton average of the previous 8 quarters. On an annual basis, 2011 bar and coin demand surged 24% to 1,486.7 tons largely due to the growth in demand for gold bars Growth in bar and coin demand was geographically widespread, with healthy gains noted in countries in all regions.”
During 2011, central banks also stepped up their buying of gold. The World Gold Council reported that some 439.7 tons of gold was purchased by central banks, the highest figure since 1964. The WGC said. “The net buying trend which started in Q2 2009 has proliferated as emerging market central banks have continued to add gold on increasing concerns about the creditworthiness and low yields of their existing reserve assets.” In addition to China, Thailand, Vietnam, Indonesia and South Korea were all buyers of gold.
According to Marcus Grubb, Managing Director of Investment at the WGC, it is likely that China will emerge as the largest gold market in the world for the first time in 2012. During 2011 the Indian market consumed more than 933 tons, accounting for 25% of total coin and bar demand. While this particular category of products saw a 5% increase, overall year-on-year gold demand in India was down 7% Meanwhile, Chinese gold consumption in 2011 rose 20% with that nation consuming almost 770 tons.
While the USA and Western Europe struggle to deal with the changing global dynamics and refuse to see and accept these changes, they will continue to blame everyone else for their downfall. They will imprison their own people as they have done in the past by imposing capital controls, higher taxes, and impose a series of measures that will erode their citizens „civil liberties‟. While nothing catastrophic is likely to occur overnight, and while it is difficult to predict when the end game will occur, it just makes prudent sense to protect one‟s wealth.
Our entire global monetary system is looking more precarious month by month, and financial leaders are yet to find any solution. And, one thing for sure, it is not going to get any better in the foreseeable future, and instead it is only going to get worse. It is important to own tangible assets in such times, and of course, gold and silver have endured the test of time and have proven to be an effective preserver of wealth. And, once again, it will prove to be just that.
Gold prices hovered around the $1730 an ounce level for most of last week. I believe that we will see a break to the upside which will see the price re-test $1775 an ounce.
Silver prices are struggling to break above the key short-term resistance level of $34 an ounce. While the price of gold hovers around $1730 an ounce, the price of silver seems to be doing exactly the same around $34 an ounce.
Like gold, the price of silver has been largely influenced by the negotiations in the Eurozone. But, now that the leaders have come to some agreement, I believe that prices will move to the upside.
Here is an interesting section of a commentary done recently by Ted Butler who I consider to be one of the best experts on silver in the world.
"Let me confess one of my greatest fears about a potential future bubble in silver. If a silver bubble does develop, by definition large numbers of uninformed investors will join in the fray, eager to capture sure profits. The concerns for risk will be cast aside, as they are in any bubble. Undoubtedly, many of my former bullish arguments for buying silver will be trotted out as current reasons for buying even as price and risk grow. I doubt very much that I will be pounding the table to buy in a silver bubble and instead will probably be way too early in suggesting its sale. Yet new uniformed buyers will mistakenly view my past pronouncements as reasons to buy after a bubble is formed. The thought that I will inadvertently be responsible for damage to the latecomers is troubling." "Of course, the risk to latecomers only grows deep into the bubble, should it form. The risk of a silver bubble bursting now is remote, because it hasn‟t formed yet. Yes, there is always the risk of short term sell-offs for reasons related to manipulative activities on the COMEX, but those sell-offs should be viewed as buying opportunities as has been the case for the life of the silver bull market to date. In terms of a bubble-like collapse in silver prices, that risk will not exist until a bubble first forms." "In the meantime, since a bubble has not yet formed in silver, what are the possible effects on the price should a silver bubble form?
Certainly, I have not been particularly surprised by the 8 to 10 fold increase in price over the past 5 to 10 years. If anything, the price performance to date in silver, given all the facts, has been somewhat muted. Leaving out a possible bubble forming, it would not surprise me to see eventual long term silver prices at $100 or even $200. That‟s without a bubble. If a silver bubble does form, it is hard for me not to imagine some multiple of those prices."
The price of silver has hit some resistance at $34/oz. While prices have recently traded in a neutral direction, I believe that we will see a break to the upside.
And, remember this: “Silver is anti bankterial- it protects one from financially transmitted diseases"
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