By David Levenstein
Gold prices seem to have stabilized for now, after a tumultuous two weeks, when the price of the yellow metal was driven down by speculators on Comex who reacted to the slightest bit of economic news.
Prices tumbled after the US Federal Reserve’s Federal Open Market Committee released their minutes from its latest meeting at the end of January. The sell-off was prompted by a few words in the minutes that hinted that the Fed could possibly end its quantitative easing programmes sooner than expected. Then, a week later, the price of gold rebounded strongly when US Federal Reserve chairman Ben Bernanke reaffirmed his support of the Fed’s monetary stimulus policies. Speaking before a congressional committee, Bernanke defended the Fed’s policy of buying bonds to keep interest rates low in order to promote growth and bring down the unemployment rate. His statement seemed to ignite all the markets and sent gold back above the $1600 an ounce level.
The price of gold fell 5% in February which can be attributed to the aggressive selling of paper gold on the COMEX. But, it is important to note that while gold fell in dollar terms, it remained quiet resilient in other fiat currencies. In euros and pounds, gold only fell by 1.1% and 0.7% respectively. For the month, gold fell just over £8 from £1,049/oz. to £1,041/oz. and from €1,225/oz. to €1,210/oz. Perhaps even more interesting is performance of gold in Japanese yen. An ounce of gold, which sold for 125,000 yen last July, now sells for 145,000 yen. It touched 155,000, an all-time record, early in February.
In the past couple of years Japanese individuals who swapped their paper currency for gold are now definitely benefiting from their action. Gold has rocketed up 36% in yen in two years.
And, this isn’t an isolated case. In recent months, gold also hit new highs in other countries, including Brazil, Iceland and India.
It is also worth noting that the US dollar has been the strongest major currency in the last two weeks as the euro has come under a degree of selling pressure due to the inconclusive election results in Italy. But despite the impasse, the state of the current economy and the recent downgrade by Fitch Ratings, a solid bond auction in Italy gave the common currency some interim support.
Elections last week have left Italy facing its worst recession since World War II. Italian government bonds fell for a second day after Fitch Ratings lowered Italy’s sovereign rating to BBB+ from A- with a negative outlook. The yield on Italy’s 2 year bond jumped the most in almost two weeks after Fitch cut its ratings and the German 10-year bunds rose for the first time in six days as investors sought safer assets. According to Fitch inconclusive elections threatened the country’s ability to respond to recession
“The increased political uncertainty and non-conducive backdrop for further structural reform measures constitute a further adverse shock to the real economy,” Fitch said in its March 8 statement. “The on-going recession in Italy is one of the deepest in Europe.”
In the meantime, Eurozone youth unemployment increased to 24.2% in January, up from 21.9% in January 2012. In the EU, under 25 year old unemployment rose to 23.6% from 22.4%. As for Greece, the youth unemployment rate in January was around 59.4%, with Spain at 55.5% and Italy 38.7%.
Unemployment numbers in France rose by 43,000 in January to 3.16 million, an increase of 10.7% from last year. The figure is at its highest since January 1997, when it reached 3.19 million.
As strange as may seem, as the crisis in the Eurozone continues, UK gilts advanced. The 10-year government bonds increased sending yields to the lowest levels in 16 months, even after the nation lost its AAA rating.
Evidently, investors are shrugging off Moody’s downgrade and are looking at UK gilts as a safe haven. Sterling has fallen 5.5% this year, the worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes, as speculation the Bank of England will need to add more monetary support to the U.K.’s faltering economy damped demand for the U.K. currency.
Meanwhile, the US President, Barack Obama warned of a “ripple effect” through the US economy that would cost hundreds of thousands of jobs after he reluctantly signed an order to begin a huge $85bn (£56bn) programme of government cuts.
“This will cause a ripple effect across the economy. Businesses will suffer because customers will have less money to spend … These cuts are not smart. They will hurt our economy and cost us jobs,” Obama said.
The hardest hit part of the government will be the Pentagon, which has to make $40bn of cuts between now and September – about 9% of its budget. Defence chiefs have already said that the move will delay deployments – such as a recent move of an aircraft carrier to the Gulf – and hurt national security.
But, almost every government department, from aviation to the park service, will be hit, with cuts amounting to about 5% of their overall budgets. Only Medicaid and welfare benefits such as food stamps are exempted. The Federal Aviation Authority has said that it will have to close scores of air traffic control towers and the National Labour Relations Board has already given staff 30 days’ notice that they could be suspended from their jobs. Over the next few weeks, more such letters will go out, threatening school services and the smooth running of scores of other government functions.
In spite of this rather sombre news, the dollar remained strong with the US Dollar index pushing through 82 to close at 82.28 and the Dow Jones Industrial Average surpassed its all-time high from late 2007. The Dow is currently trading at around 14440 topping the previous record set in October 2007 and is already up 8.8% for the year. Yet, there is no real economic growth in the US, unemployment remains at elevated levels and government debt continues to expand. Prices of shares have been artificially propped up by the Fed’s expansive monetary policy. By pumping trillions into the financial system, the Fed has convinced investors it will provide a safety net for future shocks. In addition, by keeping interest rates extremely low, the Fed is forcing investors to seek higher returns in the stock market.
Interestingly enough, despite all the money the Fed has printed and pumped into the system, over the last five-and-a-half years the Dow has not provided investors with a return. The Dow has just gotten back to where it was in October 2007 and many investors are still struggling to make up their losses after the credit crisis that erased $37 trillion from global equity values. In contrast, and even though prices have fallen in the last two years, over the last five years, gold has provided a return of approximately 120%. But, as I have mentioned many times, this is not the prime reason for investing in gold.
Currently, gold is oversold as indicated by several momentum indicators including the relative strength index (RSI). Also, current sentiment is the worst we have seen it in recent years with many banks sending out negative reports on gold.
Recently, Societe Generale’s strategists put out a bearish note on gold and recently eek Goldman Sachs turned bearish on gold. It slashed its 2013 price outlook to $1,550 an ounce from $1,810, a 14% correction. Goldman was gloomier still on 2014, predicting an average price of $1,450. That’s 8% off the current price of about $1,580. “The turn in the gold cycle has likely already started,” states the investment banks opined.
During last week, the markets were influenced by central banks latest announcements as well as the US employment report. The Bank of Japan (BoJ), the Bank of England (BoE) and the European Central Bank (ECB) all maintained the current rates and kept monetary policy unchanged.
As widely expected, the BoJ maintained rates at the current levels. The decision was unanimous and investors think new stimulus measures will come at the BOJ’s next meeting on April 3rd-4th, when Asian Development Bank president Haruhiko Kuroda, a proponent of monetary easing, is expected to have taken over as governor.
Last Friday, and as expected gold prices dropped sharply after data showed a much stronger-than-expected rise for nonfarm payrolls. Data showed the economy added 236,000 jobs in February and the jobless level fell to 7.7%, the lowest level since Dec. 2008. Economists had been calling for gains of 160,000. However, gold prices soon rebounded as traders covered short positions and the price of the yellow metal closed out the day relatively flat.
Despite the negative sentiment and downward pressure on gold, I remain extremely bullish. While I am fully aware recent trading has been particularly turbulent and incongruous as the price of gold continues to trade mostly lower, I simply see no reason to panic and sell one single ounce. And, I firmly believe that the upside for the yellow metal is far greater than the downside. And, even though most of the dire outcomes predicted for paper money have not materialized, central banks around the world are diversifying some of their paper currencies into gold.
One of the main reasons people invest in gold is not to speculate but to protect one’s wealth against what may happen in the future. By buying gold you have something of intrinsic value instead of a paper currency which could become totally worthless. Owning physical gold is like taking insurance against your government and the financial system. And, right now, no matter what the main stream media may tell you about an economic recovery, gold is something you should buy because you cannot trust your government or central bankers.
While gold may be at an eight-month low, and as most of the major investment banks have turned bearish on gold, I am frequently asked why I remain so bullish on gold. And, my simple answer is because the fundamental drivers for investing in gold have not changed, and I am certainly not going to put my trust in any government. Instead I will continue to hold physical gold.
Even though the short-term picture has a downward bias, I believe the price of gold is oversold and due to rebound.
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.
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