As Central Banks Continue to Debase their Respective Currencies, Owning Gold is Essential

By David Levenstein

Last week gold prices rallied strongly after GDP growth in the U.S. unexpectedly contracted in the final three months of 2012 and for the first time since the recession. The price of spot gold jumped from $1665 an ounce to $1685 an ounce after the Bureau of Economic Analysis reported that fourth-quarter gross domestic product in 2012 contracted 0.1%, compared against third-quarter growth of 3.1%.

Also, in a statement after a two-day meeting, the US Fed said it will keep buying $85 billion a month in mortgage bonds and Treasuries. The Fed said that economic activity has “paused in recent months” due to weather and other transitory factors. The Fed did not say how long the bond purchases would last. The vote was 11 to 1.

The gold price got another brief boost when the latest US unemployment figures were released on Friday. According to the US Labour Department, the U.S. added a less-than-expected 157,000 jobs in January and the unemployment rate ticked up to 7.9%. However, it seems that the economy added more jobs during 2012 than previously estimated as employment gains for December and November were revised sharply higher.

The number of new jobs created in December was revised to 196,000 from 155,000 and November’s figure was revised to 247,000 – the biggest increase in 10 months – from 161,000.

Annual government revisions of employment also showed that the U.S. added 335,000 more jobs in 2012 than originally estimated. That works out to 181,000 new jobs a month, above the prior projection of 153,000. After the report was released, the price of gold failed to trade higher and pulled-back to trade towards the lows of the day.

In the meantime, after applauding themselves for saving the world from a global financial catastrophe, the world’s political and financial elite wrapped up their latest annual World Economic Forum meeting held in Davos, Switzerland.

While fears over the breakup the euro currency union have abated, and as the U.S. manages to avoid the so-called “fiscal cliff” of automatic tax increases and spending cuts that threatened to push the world’s largest economy back into recession, little was said about the massive accumulation of debt from central banks and high unemployment around the world.

Most of the 2,500 world leaders, financial officials, tycoons and journalists departed the meeting with a degree of optimism that was lacking in the two previous years.

“I feel the circumstances in which I’m addressing you today are very different than 12 months ago,” said Italian Prime Minister Mario Monti in his opening speech, following a torrid year dominated by the euro crisis.

European central banker Mario Draghi meanwhile hailed 2012 as the year that the troubled single currency was “relaunched”, even as others were hailing him as the man who had saved the Eurozone from catastrophe.

The Chinese economy’s slowdown seemed less serious than a year ago to the participants while the step back from the fiscal cliff in the United States also eased minds.

And, according to the International Monetary Fund (IMF) the world economy will grow about 3.5% this year, modestly better than last year’s 3.2%. Yet the improvement is uneven. The Eurozone and Japan are in recession, but the U.S. is growing, and emerging economies such as China are expanding much more quickly.

The developed world is still recovering from the shock of the financial crisis, which began in 2007 when U.S. banks revealed heavy losses related to toxic mortgages. With banks around the world teetering, the world economy slid into deepest recession since World War II and the recovery since has been very slow.

As the meeting drew to a close, IMF head Christine Lagarde, urged global leaders not to relax as the global recovery still remains “fragile and timid” and that recovery depended on officials in the powerhouse economies of Europe, the U.S. and Japan making “the right decisions.”

Lagarde said officials in Europe have to see through reforms to prevent failed banks from adding to government debt through bailouts. Progress towards a “banking union” that would impose tougher, centralized supervision of banks to ward off failures and bailouts has been slow.

Lagarde also said the Eurozone was still in “a very fragile situation” that was made more risky through a slow decision-making process and occasional backtracking on initiatives.

Admittedly, our financial leaders have managed to stave off a complete financial melt-down, but many of the underlying issues have merely been postponed. The enormous pile of government debt around the world cannot be sustained. And, in the US the can-kicking move may have avoided a potential default that could have put the full faith and credit of the United States government into doubt and potentially set off an economic disaster, it will nevertheless deter many foreign investors from buying more US debt.

While, the major banks and financial institutions in the Eurozone have been saved for now, most regions have zero or even negative growth and soaring unemployment thus negating many of the central banks claims regarding their so called successful monetary policies. With the lack of any economic growth, the EU will not be able to escape its debt trap, and contrary to the optimism at the World Economic Forum, it looks like that growth isn’t coming in 2013.

Unemployment in the Eurozone has reached record highs. Eurostat figures released earlier this month showed November Eurozone unemployment at 11.8%, with the actual number of unemployed rising by 2 million from a year earlier.

Unemployment in several of the troubled nations was particularly alarming. Portugal’s rate was 16.3%, Greece’s was 26%, and Spain’s was 26.6% – all significantly higher than a year ago. In the meantime youth unemployment figures are a lot worse – 56.5% in Spain, 57.6% in Greece and 37.1% in Italy.

Recently, the Bank of Japan (BoJ) announced that it would introduce an open-ended asset purchase program and that the bank has agreed to double its inflation target to 2%.

The European Central Bank said that 278 banks would repay EUR 13.7 billion, or 30% of the long-term refinancing operation LTRO loan on January 30. This gave the euro a boost that was further ignited when the latest economic data showed that the German Ifo business climate index increased for the third month to 104.2 in January, up from 102.4 in December. The Eurozone ZEW economic sentiment also jumped sharply from 7.6 to 31.2 and the Eurozone PMI indices improved more than expected in January even though they still remain in contraction. The euro recently broke through the 1.36 level against the US dollar as it hit a 14 month high.

With central banks committed to print more money together with stagnant growth, high levels of unemployment, and political unrest escalating around the world, what is not avoidable is the inescapable demise of the current fiat currency system. The temporary illusion of relief bought with more money printing by the major central banks will not be possible when no one will buy the debt for sale. And, when this happens, all your paper assets will become worthless. Your savings which already are being eroded by the low interest rate environment will lose most if not all of their current purchasing power, and your pensions will be worth nothing.

While the central banks are going to do whatever it takes to preserve their respective currencies, the bullion bank cartel is going to try and cap the price of gold. But, as the banks debase their currencies, prudent investors are going to use these low prices of gold to accumulate more. And, while we may see more downside in gold prices in the short-term, in the longer-term owning gold will be like the insurance policy that will save your wealth.

TECHNICAL ANALYSIS

While the price of gold trades sideways between $1640/oz. and $1700/oz. it has found solid support at around $1660/oz. However, prices need to break above $1700/oz. for it to resume its upward trend.

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: www.lakeshoretrading.co.za

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.