Euro bounces back and gold slides but, the long term trend in gold remains very much intact.


Last week the Euro surged on the back of a massive wave of short covering on the first trading day of July and a day before US employment data was released.

This action in the euro was predominantly sparked by the news that the ECB is going to grant 78 banks EUR 111.2 billion of funds for six days to assist them with the expiry of its 12-month loans in which banks needed to repay 442 billion euros worth of debt by July 01. As the euro rallied, the gold price dropped below EUR 1000/oz for the first time since June 17.

This rebound in the euro was hardly the reason for the price of the yellow metal to drop from $1,262/oz on Monday to its low of $1198/oz on Thursday but, it may have precipitated a chain of events that led to the drop in the gold price in particular action taken by the bullion banks that use COMEX gold futures to manipulate the price of gold.

Also, I doubt that this rally is a reversal in trend for the euro, especially when the issue of sovereign debt and massive budget deficits still remain very much in focus. One of the problems is going to be the ability of countries in the Eurozone to raise finance. Spain’s recent 3.5 billion euro auction drew weak demand (1.7 times the offer) and a higher yield (cost for the government). With weak GDP growth, high unemployment, high national debt and high budget deficits, the future of the euro does not look very promising. And, investors worried about this scenario will continue to do the prudent thing and diversify some of their assets into gold.

Economic news coming out of the US, in particular the employment report didn’t offer any real positive news and private employers added fewer workers to payrolls in June than forecast, reinforcing concerns the recovery will weaken as Americans curtail spending. Overall payrolls declined by 125,000 last month as the government cut 225,000 temporary workers conducting the 2010 census. Economists projected a decline of 130,000 payrolls, according to the median forecast in the Bloomberg survey. The unemployment rate declined to 9.5% from 9.7% in May.

Soon after the report was released, US stocks declined, with the Standard & Poor’s 500 Index falling 0.5 percent to 1,022 at 4 p.m. in New York, its lowest close since Sept. 4. The dollar weakened to $1.2549 to the euro from $1.2527 late yesterday. And, gold was up just over $10/oz.

As the UK government together with their European counterparts implement new austerity plans, the problem of sovereign debt is not going to disappear. “Governments all over the world are debasing money at a rapid rate and that has always led to higher prices for real assets throughout history and it will this time too,” Rogers told Investor, Jim Rogers, a well-known, leading expert on commodities, expects gold will go much, much higher over the next decade.
“Rates are going to go much, much, much higher,’ Rogers says. “I'm judging the world as it goes. I see that actions by governments all over the world are making it worse. So I presume that will continue and gold will go that much higher over the decade.”

It seems that even the International Monetary Fund has recognized this problem and in their report prepared for the G-20 meeting in Toronto, they stated that with high and rising debt, fiscal consolidation is a key priority for the advanced economies. It would also benefit developing countries. Debt-GDP ratios in advanced economies are expected by the IMF to exceed 100 percent of GDP in the next 2-3 years, some 35 percentage points higher than before the crisis. Sovereign debt issuance by the G-3 alone exceeded $2.5 trillion in 2009 more than 7 times total net capital flows to developing countries.

In their report, the World Bank listed a few priorities required to maximize the global benefit. In their report they state that with continuing sovereign debt market stress, fiscal consolidation in advanced economies, based on high-quality measures of sufficient magnitude to restore debt ratios to prudent levels, should be a priority. In the downside, reactive policy action would be less effective and unable to access the full benefits associated with the upside. Thus, avoiding the downside scenario would be crucial.

Firstly, if any of my readers understand what this means, please give me a call. But, if I am correct, I think what they are trying to say is that there is a problem of sovereign debt; something I have alluded to many times over several months.

So, as long as western countries have huge sovereign debt to finance, the currency markets will continue to be volatile and we can expect to see further deterioration in the value of the major currencies. This will continue to drive the price of gold higher and we will look back at this latest sell-off as nothing more than a short-term correction prompted by the US bullion banks in particular JP Morgan.

The US Mint reported that their June sales of gold eagles in various sizes reached 151, 500 ounces and sales of the gold buffaloes were 33, 500. Year-to-date 673,000 ounces of gold eagles have been sold and 160, 500 ounces of gold buffaloes. Sales of the Austrian Mint’s Vienna Philharmonic gold coins in May were up six-fold year-on-year, to 238,000 oz.



Even though the price of gold has breached the 50 day moving average, I believe that this is going to be nothing more than a false break to the downside. However, the price of gold now needs to make a convincing break above $1260/oz for the upward trend to resume. We may see some sideways action before this happens.

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.

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