The rise in Gold Prices is inversely proportional to the Erosion of Trust in the financial system.
Rising Gold Prices are foremost an important signal of a decline of trust in the monetary system apart from other investment reasons. Thus Gold Prices are vulnerable to vested manipulation. Though market forces are strong, one cannot safely assume that Gold Prices may not eventually get manipulated, given the extreme fiscal conditions currently doing rounds globally. The ongoing crisis leading to repeat downgrading of the ratings of numerous countries and companies is likely to continue and with it will come a clearly positive effect for gold as safe haven. The investment focus shifts from capital growth to capital preservation after the creditworthiness of companies and government (the currency guardians) is questioned. The confidence in the financial system and paper currencies declines, while the importance of Gold increases.
Our expectation of further rises in Gold Prices is also supported by the fact that the World Gold Council, which wants to have Gold acknowledged as “Tier 1” asset within the framework of Basel III. The official sector has been one of the most sustainable buyers in the Gold market, with estimated buying of 111 metric tons till May. This has certainly helped to insert a price floor. Gold Prices have been range-bound between roughly $1,540 and $1,640 since mid-May.
The Fed’s minutes yesterday, provided no fresh clues on any easing of U.S. monetary policy forthcoming. Comex Gold prices slightly declined in the immediate aftermath of FOMC meeting results. Markets had been hoping to see more aggressive talk around the table of the QE3. Yet, Gold didn’t a sell off either, as it has in the past when it sensed a sharply reduced probability of more monetary accommodation. According to the minutes, only four Fed officials mentioned more quantitative easing in their individual forecasts – with two in support of more easing and two saying they would consider it. In fact the Fed too has been very consistent when speaking about their willingness and readiness to take action. The minutes also showed that members are willing to act further if necessary, helping prevent a large-scale tumble. And whoa – Here it comes…
I expect Gold Prices to rise amid sharp Global meltdowns in Equity Markets from the 16th July next week onward if not right from tomorrow – Friday the 13th of July. Mind it – This downside may last right till the mid of December 2012, a little longer than would be usually expected.
Equity Markets may sharply decline along with Commodities like Crude Oil & Copper leading the pack.
Equity Markets, on a cliff hanger, have been seeing little movements in the last few weeks & may now witness sharp corrections amid heavy selling globally. Recent Rate cuts by the ECB & China or even the monetary infusion by the BoE will not be able to avert or contain the crisis now waiting to burst. A full blown crisis looming close to the Banking sector of many European countries will now smash the expectations of many snobs that Western banks are strong enough to weather the storm of a full blown banking crisis in Europe, as a lot of nations & governments run out of money & their economies implode. Even the so called some strong European nations will be subject to the massacre as their own banks are loaded with the weaker nation’s paper, that’s apparently worthless at the moment. All pretensions of having the situation under control will fall apart revealing the true thread bare strength.
European central banks may become a source of supply by selling their Gold as the continent deals with disastrously massive debt issues. There are many legal and political obstacles in the path of any Euro-system central bank wanting to sell Gold or use it as collateral, particularly if it is in order to pay down or issue national debt. This makes the risk of aggressive unloading of Gold holdings by these central banks any time soon very low. Euro-zone governments cannot sell something that does not belong to them: the Gold holdings of their national central banks belong to the central banks themselves & not to the governments and selling those for monetary financing purposes would be inconsistent with European law.
Gold Prices Manipulation may be an actual truth as the last thing Insolvent Banks & Govt’s want is a Surge in Gold Prices. Gold Demand has been increasing from Hedge Funds & ETF’s as per available statistics, but the pressure on Gold Prices continue. Gold market has all the hallmarks of Libor manipulation but as usual all evidence is ignored until official sources acknowledge the truth. Bullion dealers internationally have seen a noted increase in demand for physical bullion coins and bars in recent days. It is important to be on opposite side of official manipulation as ultimately Free Market forces of supply and demand will always win out & the next few months right till the mid of December 2012 will all the more prove it. Quite a few Bullion dealers & banks have not changed their long term outlook for Gold Prices & are ignoring all recent day’s expert views suggesting further falls are likely.
Fed Chief Bernanke is a believer in using a weaker currency to boost a nation’s competitiveness and get out of a recession, and will therefore use monetary policy as a tool to spur a U.S. economic recovery. He did say that going off the gold standard during the Great Depression helped the U.S. recover from the Great Depression faster than other countries, meaning that debasing your currency is helpful. Traders are expecting the Fed to initiate a third-round of asset-purchasing program of as much as $500 billion in the second half of the year, to stimulate the U.S. economy on concerns that the recession in Europe and the slowdown in China could worsen.
We have always foreseen massive Quantitative Easing as a disastrous strategy in the long run. What happens is that none of the previous problems are fundamentally resolved, but instead redistribution of earlier misallocation takes place and problems seem to be ironed out, which later re-appear in a more fearsome avatar demanding more severe remedies. It is not going to help out in any way by simply transferring the bulk of the debt load from the private sector to the public, without making any real impact in the total debt level, or any serious reduction in the debt-to-GDP ratio.
As the dependence on these so called Need-of-the-time measures rises, so does the severity of the collateral damage. Thus repeat massive Quantitative Easing sows the seeds for an even bigger crisis at a later stage which may be beyond reasonable cure & may have very serious implications. Intervention by the Governments or by Central Banks to keep a situation in hand gets beyond its logical role & turns into manipulation. With Central Banks so heavily exerting influence, it gets increasingly difficult for the market players to ascertain the actual asset valuation. An ideal example would be the Central Banks large & repetitive purchases of government bonds.
With the 3rd round of Money Printing by the Fed, theUS$ will start its much awaited south bound journey. Quantitative Easing is considered more inflationary and likely to pressure the dollar, both of which tend to support Gold Prices. Added to the fact is, South Africa has already taken concrete steps to replace the US dollar as the favored currency for international trade transactions. From now on, the country wants to invoice in Chinese renminbi when trading with other emerging countries. Standard Bank, the largest African bank, expects trading volume in renminbi between China and Africa to hit USD 100bn by 2015. China seems to regard South Africa as the gate to the entire African market. China and Japan, too, want to increasingly avoid the US$. In December, Prime Minister Wen Jiabao and the Japanese Prime Minister Noda agreed to promote trade in yuan and yen. China has become the most important trading partner for Japan (USD 340bn per year). The two countries hold the biggest volumes of U.S. Treasuries.
The European Central Bank’s move to cut its deposit rate to zero has had an instant impact with banks more than halving the amount of cash parked there overnight. Wednesday was the first day under the new set-up and figures published by the ECB on Thursday showed banks held 325 billion euros in the facility overnight, well down on both the 800 billion they left there the previous day and the 700 billion they deposited at the same point of the last reserves period in June. ECB President Mario Draghi has said he expects the zero rate to have little impact on what banks and other investors do with their spare cash.
Italy’s national statistics body ISTAT threatened on Thursday to cease issuing data on the economy, saying it had been crippled by government spending cuts aimed at reducing national debt and righting public finances. The euro zone’s third biggest economy, whose statistics are closely watched as the country’s huge state debts put it at the center of the bloc’s financial crisis, would face stiff European Union fines if the flow of data is cut off, ISTAT President Enrico Giovannini was quoted as saying.
Spain’s austerity package, the fourth in seven months announced by Prime Minister, Mariano Rajoy, proposed a 3-point hike in the main rate of Value Added Tax on goods and services to 21% from 18% & the reduced rate to 10 from 8%. The austerity package also outlined cuts in unemployment benefit and civil service pay and perk. With five years of economic stagnation and recession, unemployment at 24.4% and tax revenue falling,Spainis struggling to meet tough deficit cutting targets agreed with the European Union.
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