gold-bar1Gold consolidates as concerns of the global debt crisis increase

According to various articles and reports, banks in Germany, France, Switzerland and the United Kingdom have a combined exposure of some USD 253 billion in Greece alone and around USD 2.1 trillion in the countries of Portugal, Ireland, Greece and Spain as a total. While debt laden Greece has to reduce it's deficit, Spain, Portugal and Ireland are also suffering from large deficits after experiencing the worst recession since World War II. As the Euro remains under pressure, Sterling was hit on concerns of more quantitative easing from the Bank of England (BoE) and the risk that the UK's deficit to GDP ratio would surpass Greece's this year.

According to the Wall Street Journal, the rating agency Moody's are concerned about the financial state of the US, UK and Japan. While most of their comments have been centered on debt and debt service in these larger nations, they are of the opinion that it will be hard for nations including the US and Japan to "grow" their way out of the debt problems. The GDPs of these nations are not expected to have average growth better than 3% over the next ten years.

The Debt-To-GDP ratio measures a country's federal debt in relation to its gross domestic product (GDP). This measure gives an idea of the ability of a country to make future payments on its debt. If a country were unable to pay its debt, it would default, which could cause a panic in the domestic and international markets. The higher the debt-to-GDP ratio, the less likely the country will pay its debt back, and the higher its risk of default. This will ultimately result in a rebalancing of values of many currencies which will result in further devaluations of many currencies. And, historically, when this happens, gold has been a perfect hedge against currency devaluation.

While the value of currencies see-saw back and forth the price of oil is likely to continue to be very volatile. And, as economists try to figure out if the US economy is strengthening or weakening, and whether the U.S. or the Euro zone deserves the stronger currency, crude is going to swing between USD72 and USD82.

At the moment it looks like a lot of confusion and no clear direction for many markets. But, one thing for sure, this financial crisis is nowhere close to being resolved.

The 191 tons of gold offered by the IMF last week is still on offer although there are unconfirmed reports that India or China may be the buyer for this gold. However, certain bullion analysts believe India is more likely to be the buyer. But no matter who is going to buy the gold, the proposed sale has had little effect on the price of the yellow metal.

In a press release made by the World Gold Council (WGC) on February 17, the dollar demand for gold remained above the $US100 billion mark for the second year in succession against the backdrop of continued turbulence in financial and commodity markets. The CEO of the WGC, Aram Shishmanian said, "2009 was a year which provided a clear illustration of the diversity inherent in the global gold market. As the year progressed a rebalancing of gold market fundamentals occurred, ensuring that as investment demand came off from the exceptional levels seen in the first quarter, total demand for the year remained robust thanks to a rebound in jewellery and industrial demand. "Gold's broad demand and supply drivers provide a unique balance in the face of economic volatility and uncertainty. This ensures gold retains its intrinsic appeal irrespective of the prevailing market conditions."

Another bullish factor for gold is the unwinding of the huge hedge books of the major miners such as Barrick Gold and AngloGold Ashanti.  In their latest, Gold Hedging Report, the VM group states that outstanding global gold hedging (delta-adjusted) fell sharply by 4.0 Moz (126t) to 7.9 Moz (245t) in Q4 2009 as Barrick Gold closed out the remaining 2.9 Moz (90t) of their hedge book, once the industry's largest. The decline brought the full-year 2009 fall to 8.0 Moz (250t) and left global hedging more than 90% lower than its peak of 102.8 Moz (3,198t) in Q3 01.

Barrick Gold were by far the largest de-hedger in Q4 2009, knocking 2.9 Moz off their book and in so doing closing out one of the longest-running and largest hedge books in the business. There were three other large hedge book reductions during the period under review and AngloGold Ashanti, now the largest hedger in the world by far, cut 407,963 oz as Q4 09 positions matured and the company carried out some minor restructuring to their 2010 positions.

As it has taken these mining companies' years to realize that gold is in an upward trend and finally unwind their hedge books, I believe that these companies will now attract new investor funds. And, once the main bullion banks reduce their extraordinary large short positions in the futures markets, then the price of the yellow metal can only move upwards. It is going to be interesting to see if the proposed meeting to be held on March 25 by the U.S. Commodity Futures Trading Commission is going to have any effect on these bullion banks. The CFTC, the top regulator for futures markets, has long enforced position limits for trading in grains, and is now contemplating similar restrictions on the number of contracts speculators can hold for other markets. It will hold a public meeting on March 25 to examine whether position limits are needed for gold, silver, and copper futures markets.

For me there are more bullish factors than bearish factors for gold, but before we see a re-test of the previous highs, gold first needs to complete this period of consolidation.


Since making a new all time high in December 2009, gold has pulled back and is now consolidating between USD1150 resistance and USD1050 support. In sideways markets as prices tend to see-saw up and down, traders often tend to buy around the support levels and sell into the resistance levels until such time as there is a breakout and a resumption of the primary trend.

About the author

David Levenstein is a leading expert on investing in precious metals .He brings over 29 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 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 and 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.