As long as the global currency crisis remains unresolved, the price of gold will continue to remain firm.
Gold prices remained relatively firm during most of last week, as prudent investors continue to buy the yellow metal. During the last three weeks, demand for gold has been particularly strong especially demand from Austria and Germany.
Two weeks ago, several major gold dealers in Austria and Germany had run out of stocks and there were reports from Athens that the Greek Central Bank is selling one ounce gold at premiums of more than 40% above spot which is equivalent to a gold price of US$1,700. And, evidently prices on the black markets are even higher.
According to an article published by Coin Up-Date, the Greek central bank sold more than 50,000 British Sovereign gold coins in the first four months of 2010. And, despite government restrictions imposed on trading these coins the Bank of Greece reports that it is selling an average of more than 700 coins per day to worried Greeks. Bank officials estimate that at least 100,000 other coins changed hands on the black market.
At the end of April the US gold exchange traded fund (GLD) held 1150 tons of gold, and now it holds 1267 tons. This is an increase of just over 100 tons in a month. It is obvious that more investors are diversifying into gold. While US Treasuries have been an excellent investment since 1980, and even though there is still a strong tendency for investors to buy them, they will soon realise that they are not the safe haven investment they once were. And, it is very clear, that in recent weeks the rush to US Treasuries was solely due to fears of a euro collapse. However, with its huge debt, US Treasury bonds are far from being a safe haven. The US government and some state governments such as California are probably in a worse financial position than Greece.
Once again, gold is full-filling its traditional role as a safe haven investment, a preserver of wealth and a hedge against the declining values of currencies. There is enough empirical evidence to suggest the system of fiat currencies is once again faltering. Recently, Mervyn King, the Bank of England Governor, was quoted as saying, "Dealing with a banking crisis was difficult enough, but at least there were public-sector balance sheets on to which the problems could be moved. Once you move into sovereign debt, there is no answer; there's no backstop."
The history of fiat money has been one of failure. In fact, every fiat currency since the Romans first began the practice in the first century has ended in devaluation and eventual collapse, of not only the currency, but of the economy that housed the fiat currency as well.
Post-World War I Weimar Germany was one of the greatest periods of hyperinflation that ever existed. The sums of money to be paid by Germany were enormous, and the only way it could make repayment was by running the printing press. Inflation got so bad in this period that German citizens were literally using stacks of marks to heat their furnaces. In April 1919, one US dollar would have bought twelve marks. And, by October 1923 one US dollar would have bought 25.26 billion marks and two months later 4.2 trillion marks. The last time I saw such figures was with the Zimbabwe dollar two years ago. While this country is of little significance in global terms, Mugabe deserves an accolade for providing us with a perfect example of how government can totally destroy their currency as well as their country.
Other examples of fiat failures include Argentina. In 1932, Argentina had the eighth largest economy in the world before its currency collapsed. In 1992, Finland, Italy, and Norway had currency shocks that spread through Europe. Then, in 1994, Mexico went through the infamous "Tequila Hangover," which sent the peso tumbling and spread economic hardships throughout Latin America. In 1997, the Thai baht fell through the floor and the effects spread to Malaysia, the Philippines, Indonesia, Hong Kong, and South Korea.
With sovereign debt expanding at alarming rates, and unless some drastic measures are taken to curtail this expansion of money, some of the major currencies might well experience the same fate. If this happens, the price of gold will go through the roof.
On Friday, Spain lost its AAA credit grade at Fitch Ratings. The ratings company cut the grade to AA+ and assigned it a "stable" outlook, according to a statement from London. Spain has held the top rating at Fitch since 2003. Standard & Poor's lowered Spain's ratings to AA on April 28.
"The process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term," Brian Coulton, Fitch's head of Europe, Middle East and Africa sovereign ratings in London, said in the statement.
Spain is struggling to cut the euro region's third-largest budget deficit as the economy, still reeling from the collapse of a debt-fueled construction boom, is forecast to contract for a second full year. Only recently, Prime Minister Jose Luis Rodriguez Zapatero stated that Spain was nothing like Greece and in The Delaire Report dated May 10, only two weeks ago, I wrote, "Recent statements made by Trichet and Zapatero only convince me that there are some huge financial problems bubbling under the surface, like a volcano."
The trend for the price of gold remains upward. Both the medium-term and long-term moving averages are positive, and with recent price action being positive, the bias remains to the upside.
About the author
David Levenstein is a leading expert on investing in precious metals .He brings over 30 years experience in futures, equities, forex and bullion. And, although he began trading silver through the LME in 1980, when it comes to gold, he has traded gold bullion, gold coins, gold shares, gold ETF, gold funds and gold futures for his personal account as well as for clients. Over the years, David has been published in dozens of publications and has appeared on SABC 3, CNBC and Summit TV (South Africa), and is a regular guest on JSE Direct, a premier radio business channel in Johannesburg, South Africa. He is also a regular commentator on www.kitco.com, www.mineweb.com, www.gold-eagle.com, and www.infomine.com 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.