The Only Way to Survive the Coming Financial Tsunami is to Hold Physical Gold and Silver

After trading within a hair of $1800 an ounce last week, gold prices have met with some resistance and have pulled back slightly. As the yellow metal struggled to break through this key level of resistance, it notched up new record highs in euros and Swiss Francs. And, in South Africa as the gold price has risen, the Rand fell by around 10% in a month due to the on-going strikes at the various gold and platinum mines as well as general unrest throughout the country.  This pushed the prices of Krugerrands on the domestic market to above R16, 000 each for the first time ever.

Although it is evident that we are still in a major bull market in gold, which is unlikely to peak for a long time to come, and despite the fact that South Africa has a long history with gold, having been a major producer for decades, thanks to the local radio and TV business channels, so much misinformation has been propagated about gold, it is unbelievable. During the run up in prices from $700 an ounce to $1900 almost all of the so called experts who appeared on CNBCA continually denigrated gold as an investment as they were totally incapable of distinguishing between gold bullion and gold mining shares.  And, as the presenters concurred with their unbelievable wisdom, very few individual investors were given the correct information about the importance of holding gold in one’s portfolio. During 2010 seventeen analysts who appeared on CNBCA shared one thing in common; their total rejection of gold. One regular who would appear in the morning and with a smirk on his face would advise viewers that holding gold was a total waste of money and time because the market was primarily dependent on a few housewives in India. I wonder what this genius would say now especially since the price of Krugerrands has doubled in the last 3 years.

Gold is not simply a precious metal used in the manufacture of jewellery, it is also monetary metal and a commodity. But, more importantly it is alternative to the fiat currencies of global governments.

Historically, various commodities have functioned as money-that is to say, as a means of exchange. Some of these commodities have included unique items of special value to certain cultures and conditions, such as salt or tobacco. However, over several thousand years only two commodities have passed the test of time- gold and silver. The reason is quite simple. Both of these metals have intrinsic value and cannot be counterfeited or manufactured at will. So, throughout history both gold and silver have functioned as money.

Gold is a monetary metal whose price is determined by inflation, by fluctuations in the dollar and U.S. stocks, by currency-related crises, interest rate volatility and international tensions, and by increases or decreases in the prices of other commodities. Interest rate differentials, domestic money supply growth, and comparative rates of inflation, central bank intervention and political stability all have an impact on gold prices. In times of global uncertainty, gold may benefit from a perceived “flight-to-safety” status. The price of gold also reacts to supply and demand changes and can be influenced by consumer spending and overall levels of affluence.

Gold is different from other precious metals such as platinum, palladium and silver because the demand for these precious metals arises principally from their industrial applications. Gold’s value does not arise from its usefulness in industrial or consumable applications. It arises from its use and worldwide acceptance as a store of value. Gold is money.

Like the Forex market gold is a 24-hour-per-day market during the business week. The day starts in Asia, extends over to Europe and then into the U.S. daytime trading hours. It is traded around the world, around the clock, from Monday morning (Sunday afternoon Chicago/New York time) in New Zealand/Asia to the close of the business week on Friday afternoon in Chicago/New York.

As you can see there are many different factors driving the price of gold, but perhaps the single most important factor over the last 10 years has been the debasement of the major currencies in particular the US Dollar.  And, as the major central banks continue to debase their currencies their policy decisions will be closely monitored by people dealing in gold, and other currencies.

And, while on the topic of monetary policy, last week, in a surprise move, the RBA lowered the cash rate by 25 bps to 3.25% as the drop in commodity prices, slowdown in Chinese economy and strength in the Australian dollar weighed on the country’s economy. The BoE left interest rates unchanged at 0.5% and also kept the asset purchase target at GBP 375 billon. Later in the day, and as expected, the ECB decided to leave interest rates unchanged. European Central Bank president Mario Draghi said the banks revamped bond-purchase programme, revealed last month, is helping to ease fears of a possible break-up of the euro.

“Our decisions as regards OMT (Outright Monetary Transactions) have helped to alleviate such tensions over the past few weeks, thereby reducing concerns about the materialisation of destructive scenarios,” Draghi told a news conference after the bank held its key interest rates at historic lows.

Last month, the ECB revealed the OMT as its new anti-crisis bazooka, where the central bank will buy up the sovereign bonds of debt-wracked countries under strict conditions.

Also, Draghi praised Spain on the progress it has made as the debt-wracked country reforms its labour market and banking sector.

The progress made by Madrid is “really remarkable when you think how many measures have been announced, legislated and implemented in such a short time,” Draghi told reporters after the ECB’s monthly rate-setting meeting.

While investors believe that Spain will be forced into requesting a bailout, last Wednesday Spanish prime minister, Mariano Rajoy denied that such a bailout was “imminent.” And, then last Thursday evening, Spanish finance minister Luis de Guindos told the audience at the London School of Economics (LSE) that Spain does not need a bailout.

“Spain doesn’t need a bailout at all,” de Guindos said. According to the finance Minister, Spain’s reform program was sufficient to stave off a full sovereign bailout and that the European Central Bank’s (ECB) bond buying program would suffice to help Spain recover.  Needless to say there was a lot of giggling in the audience.

The mere fact that the Spanish prime minister as well as the finance minister have both been emphatic that Spain does not need a bailout, you must know that the real situation is it is in desperate need of financial assistance. As I have mentioned in the past, if you want to know the truth, believe the opposite of what a politician says. We have seen this lying tactic so many times it is simply impossible to believe a word they say.

In the meantime the latest non-farm payroll report released in the US showed that 114,000 people were added to the job market in September and that the unemployment rate dropped sharply from 8.1% to 7.8%, the lowest number in 44 months. Even though the latest employment reports hints at a reduction in the number of people out of work, the number of people in the USA on food stamps has increased to a new all-time record. According to data from the government’s Supplemental Nutrition Assistance Program (SNAP) the number has jumped to 46,681,833.

As I stated a few weeks back, this is what I expected the closer the US gets to the election. Therefore, I have my doubts about the latest report. What a coincidence that the rate of unemployment should drop just prior to the elections.

All we keep hearing are more and more blatant lies from our political and financial leaders. And, in what has become entertainment for the moronic masses, namely the US election campaign, no matter who gets elected, the financial problems approaching the US will not be resolved by the stroke of a Presidential pen.  The financial problems facing the US have been totally underestimated as the focus has been on the debt crisis of the Eurozone. While the US debt cannot be sustained, the near-term problem is the “fiscal cliff.”

Even US Fed Chairman, Ben Bernanke, had something to say about the fiscal cliff.

I certainly don’t underestimate the challenges that fiscal policymakers face. They must find ways to put the federal budget on a sustainable path, but not so abruptly as to endanger the economic recovery in the near term. In particular, the Congress and the Administration will soon have to address the so-called fiscal cliff, a combination of sharply higher taxes and reduced spending that is set to happen at the beginning of the year. According to the Congressional Budget Office and virtually all other experts, if that were allowed to occur, it would likely throw the economy back into recession. The Congress and the Administration will also have to raise the debt ceiling to prevent the Treasury from defaulting on its obligations, an outcome that would have extremely negative consequences for the country for years to come. Achieving these fiscal goals would be even more difficult if monetary policy were not helping support the economic recovery.

Each time we are told that things are improving, the facts indicate that they are actually deteriorating. If there is not a huge change in policy, nothing is going to stop the financial tsunami headed for the US and the effects are going to devastating. But, if you are holding physical gold and silver you will survive this coming catastrophe. I cannot emphasize how important it is to hold gold and silver bullion. And, before you decide on participating in gold and silver mining shares, ETF’s or even funds, first build a core holding of gold and silver bullion bars and coins.

And, when it comes to gold bullion coins, items such as Mandela medallions are not gold bullion coins. They are limited edition medallions which should be avoided by investors. Do not be beguiled into believing that these are rare coins with unbelievable profit potential. Stick to investment grade bullion

TECHNICAL ANALYSIS

For weeks I have targeted $1800 an ounce level for gold prices. And, while prices struggle between $1775/oz. and $1800/oz., I believe that after this current price adjustment the next move will breach this key level of resistance and test $1825/oz. ounce then $1850/oz.

By David Levenstein
www.lakeshoretrading.co.za