Despite all the recent political rhetoric, expect to see further currency devaluations and higher gold prices.
In his speech entitled Rebalancing the Global Recovery, Benarnake not only defended his latest QE2 program, but he also attacked the monetary policy of China, which happens to be the largest holder of US debt.
In his speech Bernanke said the failure of some emerging market economies with trade surpluses to allow their currencies to appreciate was making the problems those countries face worse.
"Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spill-over effects that would not exist if exchange rates better reflected market fundamentals," he said, without explicitly pointing to China. He also went on to say that inflexible currencies were preventing a needed rebalancing of global growth and could end up destabilizing the world economy. "For large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account," he said.
Bernanke said sluggish U.S. growth, falling inflation and an unemployment rate that has hovered near 10% for months convinced Fed policymakers they needed to pump in more stimulus. "On its current economic trajectory, the United States runs the risk of seeing millions of workers unemployed or underemployed for many years," he said in his speech. "As a society, we should find that unacceptable."
In defending his monetary policy, Bernanke stated that the Federal Open Market Committee (FMOC), were fully aware of the important role of the dollar in the international monetary and financial system and that by purchasing additional Treasury securities, the Fed seeks to support the economic recovery, promote a faster pace of job creation, and reduce the risk of a further decline in inflation that would prove damaging to the recovery.
Personally, I maintain that the Fed's action has nothing to do with the interests of the global recovery and has everything to do with the exclusive interests of the United States. Furthermore, if anything, these actions will only cause the currency war to worsen. And, while many are taking delight in China "bashing," they have forgotten that as China is the largest holder of US debt totally more than $900 billion, a stronger yuan will cause losses to China since these Treasuries are denominated in dollars. And, the fact that the Chinese seem to have a better understanding of both monetary and fiscal policy than their US counterparts should not be interpreted as a reason to blame them for the mistakes made by the US policy makers. And, finally, I fail to see how the purchase of additional US Treasuries is going to stimulate employment.
The euro recovered against the dollar and Europe's bourses rallied on hopes that the Irish crisis and fate of Irish bank debt was close on being resolved. Credit default swaps on Irish, Greek, Portuguese and Spanish debt continued to hover at high levels amid confusion over the contagion risk. Irish bond yields soared in recent weeks on mounting worries about the government's ability to meet the cost of rescuing its crippled banking sector. European officials upped the pressure on Ireland to apply for a rescue as turmoil spread to other peripheral bond markets, pushing up borrowing costs for Portugal and, to a lesser degree, Spain. And, any deal between the Irish government and the European Union and International Monetary Fund is ultimately aimed at reducing the turmoil in sovereign bond markets that policy makers fear could one day price Portugal or even Spain out of global credit markets.
An article in Market Watch on Friday November 19 highlighted the waning confidence of Irish bank customers. According to the article, Allied Irish Banks have had to access a range of liquidity facilities from central banks, adding that its customers withdrew 13 billion euros ($17.8 billion) from their accounts since the start of the year.
As I continue to repeat myself once again, these are the kind of events that lead to volatility in the global currency market and will result in the further debasement of the world's major currencies which will then drive the price of gold higher. And, as I have stated countless times, gold is merely fulfilling its traditional role as a hedge against the declining value of these currencies in particular the US dollar.
In order to take advantage of this scenario, one must include gold in one's investment portfolio. While there are many different investment instruments available including gold bullion, gold bullion coins, equities, gold exchange traded funds, gold funds, futures and options I have long advocated accumulating a core holding of the physical metal. This does not include medallions or numismatic items. While many investors have done exceptionally well with numismatic items, it is an area that requires special knowledge. Just because a coin is old doesn't necessarily mean it is going to be worth a fortune. There are literally thousands of numismatic coins available around the world, and thus making a decision on the correct coin is not an easy decision. Basically a coins value depends on its rarity (the rarer the coin, the higher the premium) and the quality. But, in addition to this one has to determine what coins are in demand and what coins aren't. For me buying bullion coins is a whole lot easier. All you really have to know is the current price of gold, and that is not difficult to do no matter where you are in the world.
Even though many world mints as well as numerous coin dealers offer a range of medallions, as far as I am concerned, these have no investor appeal whatsoever and should be considered only as collector items. Simply because they may have an image of some famous personality stamped into the obverse and reverse sides of the coins, and are presented in well-crafted velvet lined wooden boxes, does not mean that they offer better investment potential. Invariably dealers who sell these medallions tout them as being "rare" simply because they are limited in edition, and tell you they will increase many fold in years to come. Let me state, that you cannot create rarity just by minting a limited edition. Maybe they will become rare, maybe they won't. Rarity is determined by the remaining number of coins from the original mintage and not because a mint/dealer decides to mint a limited number of pieces. In fact, if a dealer claims these limited edition medallions are a better investment than bullion walk away or simply hang up All they are trying to do is to sell you a more expensive item which invariably has a huge mark-up in an attempt to make themselves some good commission. And, for sure, many of these "limited edition medallions" are new releases with no price track record. And, so how can you determine what the real value of these are. Gold bullion coins on the other hand have a long price history. All you need to look at the gold price over the last 10 years or so. Like I have just mentioned, stick to bullion.
The price of gold is building a new support level at around $1325/oz which also coincides with the medium-term support level of the 50 day MA I expect to see the price of the yellow metal to continue to trade with an upward bias.
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.