Gold Prices Advance as Global Debt Issues Give Investors the Jitters

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By David Levenstein

Gold prices surged in Asian trade Monday, after US authorities failed to agree on a debt ceiling, and with no apparent progress toward a deal the financial markets have the jitters. Spot gold traded as high as $1620 an ounce at 5 p.m. Singapore time.

The yellow metal has benefitted from the uncertainty stemming from global debt problems in recent weeks, with the deadlock in U.S. negotiations now in the spot light. U.S. lawmakers failed to reach an agreement on an approach to raise the debt-ceiling in Washington on Sunday, despite a weekend of talks.

The $14.3 trillion debt ceiling needs to be raised by Aug. 2 or the government is at risk of defaulting on its obligations. While the White House is attempting to push its TV ratings through the roof with their new financial thriller entitled The US Debt Ceiling Crisis, credit agency Standard & Poor’s sees a 50/50 chance of downgrading the US AAA rating to AA.

While I have no doubt that the US government will come to an agreement at the last minute, investors around the world are slowly waking up to the fact that the worlds’ reserve currency is faltering as is the global fiat monetary system.
On Thursday, Eurozone leaders together with the private sector, agreed to provide Greece with another 159 billion euros to stop debt contagion across Europe.

The private finance sector agreed to provide 50 billion euros of funding which will be added to 109 billion euros from European governments and the International Monetary Fund, in a deal reached at an emergency summit.

“We have shown that we will not waver in the defence of our monetary union and our common currency,” said EU president Herman Van Rompuy.

“This threat had to be contained, otherwise the situation could have led to a serious loss of confidence in our common currency and could even have jeopardised the on-going economic recovery in Europe and the world.”

As part of the package, the Eurozone will offer Greece lower interest rates and extended maturities “to decisively improve the debt sustainability and refinancing profile” of the country, according to the summit statement.

“The financial sector has indicated its willingness to support Greece on a voluntary basis,” it said, a crucial point for how the agreement is viewed by markets, which could consider the deal as an effective Greek debt default.

The head of the IMF, Christine Lagarde, declined to say how much of the new bailout the international lender would provide, saying Greece had yet to formally approach it for a loan.

European Central Bank chief Jean-Claude Trichet hailed the agreement as a “crucial” step and one which would not trigger a “credit event” obliging creditors to claim insurance for their loans.

The agreement expands the scope of the Eurozone’s crisis fund, allowing it to relieve debt-stricken nations by buying their sovereign bonds at lower prices on secondary markets and providing bailouts for their banks.

“Euro area member states have agreed to significantly improve the financing terms with Greece,” Lagarde told reporters. “That is clearly a major improvement.”

The agreement also agrees to extend loan repayments and lower the rates paid by Ireland and Portugal, the two other Eurozone states that had to be bailed out after Greece.

“That is really a game changing decision,” Lagarde said.

To ease Greece’s debt repayments on its loans, the summit agreed to extend them from 7.5 years to between 15 and 30 years in some cases, and at a rate of 3.5%, down from 4.5%.

Figures released by the leaders after the summit said the measures would reduce Greece’s debt by 26 billion euros — equal to 12% of its Gross Domestic Product — by the end of 2014.

The package “creates a sustainable path for Greece … a lightening of the burden on the Greek people,” said Greek Prime Minister George Papandreou. Greece has debts of 350 billion euros ($500 billion) or about 160% of GDP.

“The only thing we’re asking for is the right to make deep changes in our country to make our country a viable one, one of growth and jobs creation,” said Papandreou.

Frankly, we have heard this before, and while the European leaders gamble on Greece being able to repay its loans somewhere between 15 and 30 years’ time, I foresee further requests for financial assistance years before any of these bonds mature. Furthermore, while this bailout package may provide temporary relief for Greece the problems in the Eurozone are far from being resolved.  

While I believe that the debt ceiling will be increased, which may prompt some selling of precious metals in the short-term, no matter which way you look at it, the US has no other alternative other than to continue with their expansionary monetary policy. And, as the US Fed and ECB continue to debase their respective currencies with this monetary policy and as more investors lose confidence in these paper currencies and look for a safe haven, both gold and silver will benefit from a new influx of investor funds.

TECHNICAL ANALYSIS
The price of gold is about to break above $1600/oz and make new record highs.

 

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About the author
David Levenstein is a leading 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.

His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
For more information go to: lakeshoretrading.co.za