Gold remains the perfect hedge against the on going debasement of global currencies.
The last week was one of the most volatile weeks we have seen in months. As concerns of global sovereign debt spread around the world, the Dow dropped 5.7%, and the S&P 500-6.4%. There was a 5.9% fall in CRB commodities index and 12.8% fall in crude oil. At one point the price of silver was down by almost 10% but it recovered by the close of business on Friday. As the turmoil in currencies continues, the dollar index managed to breach the 85 level before closing at 84.47. As far as I am concerned this is not due to any fundamental strength in the greenback, and the reason is clearly due to the collapsing euro. And, while yields soar in the government bonds of Portugal, Italy, Ireland, Greece and Spain, the gold price holds firm.
Violent protests erupted in Athens last week as people protested at the austerity measures proposed as part of Greece's acceptance of the eurozone bail-out package. However, it seems that the worry for the European leaders is whether economists are right to warn that the politicians are losing control of a spiralling European debt crisis.
After the close of the markets on Friday, European officials ended a summit with another round of promises for regional stability and efforts to defend the euro from speculation. The problem facing the regional economy is far from normal. After weeks of empty political rhetoric, policy makers have been forced into action as the EU (in conjunction with the IMF) has seen its obligations inflate from 45 billion to 110 billion euros in loans just to prevent Greece from collapsing. What's more, with downgrades to Spain's and Portugal's sovereign credit ratings, doubt has been cast over the health of other EU members.
But in Lisbon Thursday, European Central Bank president Jean-Claude Trichet dismissed fears of a Greek debt default and insisted that two other eurozone states seen as vulnerable to financial pressure, Spain and Portugal, are not in the same boat as debt-ridden Greece. There were even rumors that Spain has already asked for EUR 280b of aid from EU/IMF but that was denied by Spain's Prime Minister Luis Rodriguez Zapatero.
What makes me believe that the crisis in the eurozone is a lot more serious than we care to imagine are statements made by politicians and financial leaders in particular those statements that are aimed at reassuring the masses that everything is under control. Recent statements made by Trichet and Zapatero only convince me that there are some huge financial problems bubbling under the surface, like a volcano.
Another key development to watch will be political negotiations in UK. The general election was inconclusive, as widely expected, with Conservative Party getting the largest number of seats but short of a majority. As Conservatives discuss a coalition with the Liberal Democrats, markets are still concerned about the UK's huge deficits.
In a week of market turmoil resulting from Greece's fiscal crisis, oil went from an intraday high above $87 on Monday – its highest point in more than a year and a half – to plunge briefly below $75 on Friday.
The benchmark West Texas Intermediate contract settled at $75.11 a barrel on Friday, its lowest point since February, compared to $86.15 a week earlier – a decline of nearly 13%.
The euro on Thursday dived to the lowest level against the dollar for more than a year, with big falls also seen on Asian stock markets this week. While investors worry about the contagion effects of the Greek fiscal crisis gold continues to edge higher in spite of a "strong" US dollar and weaker oil prices.
While the Greek drama is fascinating to watch, I believe it is merely a glimpse of what is to come. And, as I alluded to in my notes of more than a year ago, we are now witnessing the debasement of currencies which will continue as the problem of sovereign debt will only get worse over the coming months.
Whether you understand it or not, the important thing to realize is that when there is a currency crisis as we are witnessing now, gold acts as a hedge against the declining values of these currencies. As this currency debasement continues as a result of governments producing more and more fiat money, it takes an increasing amount of any given fiat currency to buy an ounce of gold. And this is exactly what we have seen recently as the price of gold in euros, sterling, Swiss francs and yen hit new record highs. And, by the looks of things we are soon going to see gold make new highs in US dollars, Canadian and Australian dollars, Russian rubbles, Mexican pesos and South African rands.
The price of gold breach of the key resistance of US$1160 and it's move to US$1200 indicates a possible move to US$1260 in the short-term.
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.
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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.