Diversify some of your Fiat Money into Gold before it is too Late

By David Levenstein

Since the middle of October the price of gold has been building some solid support above the $1700 an ounce level. However, it continually came into selling resistance at the $1720 an ounce and then again at the $1740 an ounce. All of this selling pressure can be attributed to the action of traders and especially those on Comex, meaning none of the selling was for hedging purposes and none of it had anything to do with an increase in the supply. Nevertheless, traders were able to influence prices using massive sell orders in this paper market. 

The gold market then went on hold as it waited for an outcome of the US election. Then, there was constant talk about an imminent attack on Iran by Israel, and then it was the strikes at the gold mines in South Africa. But, none of these issues are the real driving force behind the gold price at the moment.

Suddenly, the turmoil in the Gaza area was supposed to send the prices of gold higher, but in actuality, they had little to no impact on the price of the yellow metal. In fact, two days after the cease fire, prices rallied sharply. The threat of escalating violence in Gaza has dissipated for the time being as a ceasefire went into effect in and around the Gaza Strip, after Israel and Hamas agreed to cease hostilities. The Egyptian foreign minister announced the ceasefire agreement hours before it took hold at 19:00 GMT on Wednesday.

Last Friday gold prices rallied sharply sending the price through a key resistance level of $1740 an ounce before piercing its 50 day Moving Average. The price of the yellow metal spiked due mainly to a weaker dollar and money moving into a broad range of risk assets. The upside move in gold was also aided when it broke through a key technical resistance level and triggered a wave of buying. However, it is still much too early to say that this is a decisive break above the $1750 an ounce level.

As I have already mentioned the situation in Gaza had little impact on gold prices, and the price has been driven by other factors, in particular the deteriorating situation in the Eurozone and the uncertainty over the U.S. “fiscal cliff.” 

At their latest summit in Brussels, European policy makers failed to agree on a seven-year budget for the bloc. European Parliament President, Martin Schulz, told the 27 European Union heads of state and government gathered in Brussels, that they were acting “extremely irresponsible,” when they failed to agree on the necessary funding for the €1.091 trillion budget proposed by the European Commission.

Every seven years, European Union leaders must come together to agree on a new spending plan, and this year’s Commission proposal has been particularly controversial. At a time when many EU countries have tightened their belts significantly, an increase to the EU budget, slight though it may be, has not proven popular among net contributors. The UK would like to see the budget cut to between €890 billion and €960 billion and Germany proposed the budget should be around €960 billion) However the remaining countries have supported the higher figure proposed by the Commission.

European policy makers have now turned their focus to providing funds to keep Greece solvent. The Eurozone finance ministers held a conference call on Saturday to prepare for their third meeting this month, today about Greece’s rescue.

“There’s no time to waste” in finding a solution for Greece, German Chancellor, Angela Merkel, told reporters on Saturday in Brussels. A plan “is being intensively worked on,” she said.

European commissioner, Rehn, said that he saw “no reason why we should not be able to conclude the package”. Meanwhile, German Chancellor Merkel also said that there were “chances to get a solution on Monday”. So, we’ll just have to wait and see.

After a marathon meeting on Monday night, European finance ministers finally agreed on a deal for Greece, opening the way for the latest installment of bailout money to be released – a crucial measure if the country is to avoid a catastrophic default on its debts and an exit from the single currency.

The first disbursement is set to take place Dec. 13, said, Jean-Claude Juncker, head of the Euro group of finance ministers.  According to, Juncker, the deal includes a plan reduce Greece’s debt level to 124% of its gross domestic product by 2020 and below 110% by 2022. The IMF had originally insisted on a debt-to-GDP ratio of 120% by 2020.

It will also include a cut of 100 basis points on the interest rate charged to Greece by other Eurozone member states — excluding those that are also receiving bailouts.

“This is not just about money,” Juncker said. “It is the promise of a better future for the Greek people and for the euro area as a whole.”

The head of the IMF, Christine Lagarde, also said the agreement was significant.

“We wanted to make sure that Greece was back on track,” Lagarde said. “If you put it all together it is a significant amount.”

Greece will get €34.4 billion ($40.84 billion) straight away and the rest in separate installments in January, February and March.

The money is going to prevent Greece from defaulting on its debt obligations and to also pay thousands of government workers. But, will it do anything to revitalise the Greek economy, I doubt it.

Despite the rhetoric of most of the European leaders, things in the Eurozone are not improving at all, and instead they are simply getting worse daily. As these leaders continue with their hopeless attempts to cover up the real situation, prudent investors are losing faith with the global fiat currency system and are looking to diversify into hard assets especially gold and silver. 

For years the scoundrels who have run the global central banks tried all sorts of tricks to have gold deleted from their list of monetary reserves. They swapped, leased, and sold as much gold as they could as they ploughed into paper assets in particular the US dollar and US Treasuries. But, like everything in life, this cycle is now coming to an end, and things are changing around the world. And, as the US dollar looks set to lose its pre-imminent position as the reserve currency of the world, central banks are becoming more concerned about the value of their paper assets and some of these banks are accumulating as much gold as possible. 

Even though global gold demand in the third quarter was down 11% from a record high in the third quarter of 2011, and demand from China fell by 8% according to the November 2012 World Gold Council Gold Demand Trends Report. The decline in Chinese demand reflects a 6% drop in jewellery demand and negative sentiment sparked by the slowdown in China’s economy. At the end of September, China’s economy had slowed to its slowest pace in three years. Despite the global slowdown, demand for gold remains resilient.

According the World Gold Council (WGC) demand for gold bullion bars and bullion coins fell in the third quarter. The WGC stated that the demand from this category of investment was 30% weaker year-on-year at 293.9 tons, translating to a 32% decline in value to US$15.6 billion. The WGC also stated that since the demand last year was exceptional, the comparison is a somewhat distorted. “It is important to note the extent to which the year-on-year comparison for bar and coin demand is affected by the extraordinary levels of demand witnessed during Q3 2011.That quarter saw a record 422.1 tons of bar and coin demand which was almost double the prevailing 5-year quarterly average”. Investors reacted to the conditions of the time: a worsening of the European debt crisis, a weaker US dollar, a US debt downgrade, poorly performing equity and credit markets and rising inflationary pressures all strong drivers of demand for gold.

Investors in Europe particularly in German speaking markets accounted for over 50% of the 128.1 ton decline in bar and coin demand as investors were less aggressive in their purchases relative to Q3 2011.

The drop in demand for gold and coins was largely offset by an increase in demand for ETF’s, and medals/imitation coin segments. Investors who are concerned about the consequences of additional monetary stimulus seemed to add to the ETF positions. On a year-on-year basis, ETF demand was the strongest performing sector generating a 48.6 tons increase in demand. At 136 tons, Q3 was the strongest quarter since Q2 2010.

The report also indicated that the demand for gold from India is beginning to recover. Demand was up 9% to 223.1 tons from 204.8 tons in Q3 2011 following increases in both jewellery and investment demand. In comparison with Q3 2011 jewellery demand was up 7% to 136.1 tons and investment demand rose by 12% to 87.0 tons.

Central banks bought 97.6 tons in Q3. Marcus Grubb, Managing Director, Investment at the World Gold Council said:

“Gold is beginning to re-establish itself as part of the fabric of the financial system. In the medium term, the quantitative easing initiatives in the West and the continuing growth story in the East, particularly in India and China, coupled with the seasonally strong quarter coming up in Asia, are excellent indicators for further growth in the gold market.

“Against a backdrop of continued global economic uncertainty and elections in China and the US, it is clear from five year rising demand trends that gold’s fundamental property as a vehicle for capital preservation continues to endure, as evidenced by this quarter’s increase in global ETF investment, up 56% and continued purchasing by central banks, the ultimate long term investors.”

Another development taking place amid all this economic turmoil is that more central banks are being forced to reveal the exact situation regarding their gold reserves. This implies that global central banks are taking their gold holdings a lot more seriously than they have in many years. In many instances most of the gold is still being held outside of the respective countries in the major bullion centres such as London. The concern of these banks is whether their physical gold can be accounted for or not.

The price of gold has held above the $1700 an ounce level and with continued accommodative central bank monetary policies, the demand for gold and silver as a hedge against inflation and exposure to the debasing of industrialised nations’ currencies will remain very strong.

It is clear that gold is been recognized as alternative to the global fiat currencies. And, as it gains in importance in the global financial system, you had better be sure you own some physical gold. And, for those investors who own euros, my advice is  to swap them for gold.

TECHNICAL ANALYSIS

Now that the price of gold has broken above another level of resistance set at $1740 an ounce, and has pierced the 50 day Moving Average, the price action will be closely watched over the next few sessions to see if it can hold these levels.