During the Next Few Years, as the Value of Cash is Going to be Severely Eroded it is Essential to Own Gold and Silver

By David Levenstein

Gold prices surged by more than four per cent or $66 an ounce on Friday smashing above the major key resistance of $1600 an ounce. And, in the worst day of trading since November 2011, the Dow gave up all of the gains it has accumulated in 2012. The Dow dropped 275 points, or 2.2%, and the S&P 500 fell 32.3 points, or 2.5%. The Dow is now down 0.81% for the year.

The rise in the price of gold and the plunge in equities can be attributed to the disappointing May jobs report released in the US on Friday. The US Labour Department reported early Friday that non-farm payrolls climbed by a mere 69,000 in May – the worst number in the last twelve months. The general market consensus expectations compiled by various news organizations had been for around 150,000 to 170,000. Further, the number of new jobs was revised downward for each of the two prior months. April jobs gains were reduced to 77,000 from an original estimate of 115,000, while new March jobs are now listed at 143,000 rather than the previously reported 154,000. The US unemployment rate edged up to 8.2%.

In addition to the shocking jobs report, the US ISM non-manufacturing index unexpectedly dropped to 53.5 in May. And the UK PMI manufacturing dived from 50.2 to 45.9 in May, the lowest level since May 2009. In China, the official manufacturing PMI dropped sharply from 53.3 to 50.4 in May while the HSBC manufacturing PMI was also revised down to 48.4.

Almost as soon as the US Labour Department released its report on Friday, the price of gold began is sharp ascent and within a matter of hours it was up by more than $60 an ounce. But, to put things in the correct context, the reason why gold had this sudden dramatic move to the upside was due to speculators taking the long side of gold in the belief that the poor data will prompt the US Fed into additional quantitative easing which will be very supportive of gold. And, as the price of gold shot up, those traders with open net short positions were caught on the wrong side of the trade and scrambled to cover their positions to limit losses. This additional buying accelerated the buying momentum in gold futures.

This action in gold is another example of the huge dislocation that exists between the paper market (Comex) and the physical market for gold. While there is no doubt any additional monetary stimulus from the US FED will be bullish for gold the price of gold was moving upwards long before we even heard of Operation Twist or Quantitative Easing, or LITRO etc. While it seems the only solution is for the US Fed and the ECB to print more money, the underlying problems are much more serious. While the printing of money will lead to a debasement of the respective currencies, the unprecedented levels of sovereign debt are simply not sustainable, and the current monetary system looks more precarious each day. But in addition, we are in the midst of an economic slowdown, a currency war, and increasing global unrest. Unfortunately, most of these problems have been caused by the flawed policies of our current leaders, and, if there is not a change in their thinking, the potential for a total collapse in our current fiat monetary system is becoming a real possibility. And as we watch the Eurozone disintegrate as institutional capital flies out of the region, guess what? The financial leaders of the G-7 are having yet another meeting. By now, all their expenses for travel and accommodation must have exceeded Greece’s GDP.

Spain needs money to bail out its banks and it wants the ECB to help. According to various sources, the amount needed for Spanish banks is 60 billion to 80 billion euros, which could come from the Europe’s rescue fund. The problem is, while Spain wants Europe to inject money directly into these banks, as in the bank bailout program in the United States in 2008, Germany, has no desire to subsidise the losses of these banks. It wants massive spending cuts and perhaps even losses for the mostly Spanish investors who hold the stocks and bonds of these failed banks before they even contemplate bailing out the Spanish banking sector.
As negotiations take place, money continues to flee Spain at an alarming rate. According to figures from the Spanish central bank, 66 billion euros left the country in March as investors sold Spanish stocks and bonds with abandon. And in April, the outflow of deposits from Spanish banks also picked up, with 31 billion euros leaving the Spanish banking system, according to the European Central Bank.
As the number of investors willing to hold Spanish assets of any kind diminishes by the day, money is also being pulled out of Greek banks at an alarming rate. Since May 6th, almost one billion dollars has been withdrawn from Greek banks.  If Greece does abandon the euro, all euros in held by Greek banks will likely be converted to drachmas, and the value of those drachmas will almost certainly decline dramatically.  In fact, it has been estimated that Greek citizens could see the value of their money in bank accounts decline by up to 50% in such an instance.

Although Greece is certainly not a major world power and if the country were to default on its debt obligations I very much doubt that it would have much impact on the US economy or even the European economy for that matter. And, it most certainly won’t have any serious implications for the Asian economies. But, the consequence of such a dramatic move could lead to the eventual unravelling of the Eurozone. But, before this happens we may see individuals with euros in Italian banks or Spanish banks withdraw their money and deposit their funds elsewhere.  So the bank runs that are happening in Greece right now are only a preview of things to come.  Alternatively they will buy gold and silver.

No matter what course of action our current financial leaders decide on, more and more people around the world are losing confidence in paper money and gold is gradually regaining its status in the monetary arena. While the issue of unemployment must be tackled by governments around the world, if they continue with the same policies things will probably continue to deteriorate.  And, while the majority of the masses will be beguiled into believing that things are improving, the prudent few will not be so easily duped and will not make the mistake of having blind faith in their governments. Instead they will prepare for the economic chaos that will soon be unfolding all over the globe. And they will take the appropriate action to protect their own wealth. Over the next few years, the value of cash is going to be severely eroded and hence, it is important to own gold and silver.

TECHNICAL ANALYSIS

Although the price of gold exploded on Friday and broke straight through the $1600 an ounce level, it is vital that the prices hold above this level and trade higher before we can be sure that the bottom of this correction has been posted. I believe that we have seen lows in May and we will soon see prices move above $1625 an ounce. However, it will be interesting to see if prices can break above the 50 day MA in the short-term.

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.

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.