Central Banks will have to print more money in order to prevent a total collapse of the monetary system.

Last week, gold came under some strong selling pressure from traders on Comex as they managed to knock gold prices down by around $60 an ounce. The sell-off began on Wednesday when prices fell below the key support level of $1600 an ounce after, Ben Bernanke, Chairman of the US Fed announced the outcome of the US Federal Open Market Committee meeting.

The US Federal Reserve said it would extend its holdings of long-term government bonds by $267 billion in another effort to bring down borrowing costs. The Fed, which is selling an equal amount of short-term securities to hold steady the size of its $2.9 trillion balance sheet, is extending the so-called Operation Twist program that was due to end in June through the end of the year.

In his statement, the Fed chairman, Ben Bernanke said Keeping Operation Twist in place “should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative.” Bernanke also said. “The Fed is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labour market conditions.”

Since Operation Twist does absolutely nothing to stimulate economic growth or reduce the high level of employment in the USA, and without a new round of monetary stimulus from the US Fed, a global sell-off of commodities ensued. But, the drop in prices of gold was once again a pure speculative play as the underlying fundamentals remain sound with investment demand, particularly from ETFs, Asian demand and central bank demand remaining extremely robust. Prudent investors have not been selling, and instead most continue to accumulate on these dips. These investors have a long-term perspective and evaluate the events that impact on the global financial as they occur and do not get distracted by a short-term price drop caused by traders using futures contracts on Comex.  Also, they ignore most of rhetoric dished out by our leading political and financial leaders. Right now, contrary to what we are told, the financial crisis is in worse shape ever since the collapse of 2008.

Last Wednesday, just three days after Sunday's election, a coalition government was formed in Greece, consisting of the conservative New Democracy, the Socialists (PASOK) and the moderate Democratic Left (Dimar). The new Greek prime minister is Antonis Samaras, leader of New Democracy. In contrast to the left-wing party, Syriza, all three parties in the new government broadly support Greece's bailout deal with the European Union and International Monetary Fund (IMF).

The new party certainly doesn’t have a miracle cure for Greece’s financial woes and while it is widely believed that Antonis Samaras will renegotiate the €130bn (£104.4bn) bail-out agreed in May, the country is essentially bankrupt, and is going to have to ask for a third international bail-out. Athens has to reduce its budget deficit to below 3% of GDP by 2014 and find a further €11.5 billion in public spending cuts by 2014. In a new agreement the next government is likely to ask for that deadline to be extended by two years.

In a sudden and unexpected turn of events, the new finance minister of Greece, Vassilis Rapanos, resigned from his post as he was taken ill before he could be sworn in on Friday. And, the newly elected Prime Minister, Mr Samaras, was released from hospital yesterday after undergoing eye surgery to repair a detached retina over the weekend. As he will have to stay home for several days he won’t be able to travel to Brussels for the EU summit this week.

The EU summit this Thursday and Friday comes just a week after Greece’s new coalition government was formed and it was widely believed that Greece was to use this opportunity to renegotiate some of the austerity measures it has agreed to in return for billions of euros in rescue loans from the International Monetary Fund and other European Union nations.

The situation in Greece becomes increasingly desperate by the day. By borrowing more money, the economy in Greece will not grow thus leading to higher levels of unemployment and further unrest not mention a continuation of a flight of capital. And, before things completely break down, the government will impose capital controls and an outright confiscation of wealth. Evidently, in Greece the government is already helping itself to people's savings and pensions.

While fears of a Greek exit from the Eurozone and a collapse in the euro have abated somewhat, the fact that Greece has a new government means absolutely nothing, and the outcome of this election does nothing to alleviate the weak fundamentals in the Eurozone in particular in Spain and Italy.

Italy and Spain have their own financials problems and the bond market reaction to the Greek vote suggested that the Eurozone crisis is far from being resolved as yields continued to rise. Although an independent audit of Spanish banks showed that Spanish banks need between 60 billion and 70 billion euros ($75 billion to $88 billion) in capital, the Spanish Treasury managed to sell 2.22 billion euros ($2.81 billion) of bonds which was above a 2 billion-euro maximum target for the sale. Three-year bonds maturing in July 2015 fetched an average rate of 5.547%, compared with 4.876% on May 17, and the most since at least 2004. But, in spite of Spain’s deteriorating finances, Spanish banks that are essentially bankrupt managed to buy Spanish bonds. Obviously, these banks are buying bonds in an attempt to keep rates low because the longer Spain must pay high rates simply to raise the money needed to handle the government’s basic operations, the deeper into debt it will go and the more likely it will ultimately need the biggest European bailout which looks imminent within the next two years.

On Tuesday, the rating agency Moody’s Investors Service cut its rating on 28 Spanish banks and two issuer ratings today. The banks have several links to the sovereign, Moody's said in a statement, and so Spain's reduced creditworthiness "implies a weaker credit profile for Spanish banks.

"The banks' exposure to commercial real estate was another factor in the cuts, Moody's said, because higher losses are likely, "which might increase the likelihood that these banks will require external support."

Among the downgrades was a cut to Banco Santander's long-term rating to Baa2 from A3 and remains under review for further downgrades.  Santander has considerable operations throughout Latin America, including Brazil, the region's largest economy. Its exposure in emerging markets, many of which are growing, helps offset its exposure in the Europe.  The rating agency also cut Banco Bilbao Vizcaya Argentaria SA to Baa3 from A3 – just barely above junk status. Bankia, which asked for a bailout last month, slid all the way to speculative grade, down to Ba2 from Baa3. Last month Moody's downgraded 16 Spanish banks.

In the meantime Italian borrowing costs are also increasing. Italy and Spain which account for more than a quarter of the euro-area economy, are heading for sovereign bailouts in the next 12 months that will send shockwaves through the global economy. What is interesting to note is that Spanish government debt is largely held by Spanish banks, Greece government debt by Greek banks, and Irish government debt by Irish banks. However, Italian government debt is held mainly by Germany, France, and Belgium in addition to the large holdings by Italian banks.

Evidently, according to an ECB official, who declined to be identified because the discussions were private, the ECB has decided to lower the minimum rating threshold for mortgage-backed securities to BBB- from A-. Spanish banks have been unable to use some securities as collateral because the rating is too low, the person said.

While bankrupt banks persist in borrowing money to increase their holdings of toxic assets, people will lose confidence in the monetary system and the flight of capital from countries such as Greece, Spain and Italy will escalate. But, as I don’t believe that the financial leaders of the Eurozone will allow a run on banks or a collapse of the banking sector, they will be forced to print more money… a lot more money. And, as they do this the rich and powerful will be protected at the expense of the masses. Soon we will see   ATM limits being imposed at many banks across the continent in addition to new capital controls as well as a hike in taxes.

So, instead of hording cash, prudent investors will turn to gold and silver. And, while speculators on Comex try their utmost to knock down the price of gold, any drop will be short-lived as demand for the physical will increase. And, as the decline in the value of fiat currencies accelerates, individuals who have accumulated gold and silver will be well rewarded.


 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.