Expansionary monetary policies, exploding national debt and global currency devaluations, are creating a very favorable scenario for the price of gold.
After the Greek government announced a pensions freeze, spending cuts and tax rises to slash 4.8 billion euros (6.5 billion dollars) from this year's public budget in a bid to reassure both peers and markets, the head of the European Commission, Jose Manuel Barroso, said the European Union, more particularly the leading partners within its 16-nation euro currency area, would come through if Greece still needed more help. "Greece can count on this solidarity," Barroso underlined. "We have always shown solidarity to all EU member states and we'll show that in the future," Barroso told reporters.
While this may be some positive news for Greece, the fact still remains that there is a growing concern about global sovereign debt. In addition to Greece, there are potential problems in Dubai, Ireland, Spain, UK, Latvia and Japan. Ironically, as these problems emerge, investors rush into the US dollar as the ultimate flight to safety even though the US dollar looks rather precarious these days. With national debt now in excess of USD 12 trillion, unemployment at 9.7%, interest rates at practically zero, as well as an economy that has very low GDP growth, the only reason why the US dollar is rising is because the other major currencies are collapsing.
During the week the ECB left benchmark interest rate at 1.00% as widely expected. Regarding the economy, Trichet said that the euro-zone's economic recovery remains on track but again warned that it could be "uneven." Interest rates remain "appropriate" and inflation expectations remain firmly anchored. The Bank of England left rates unchanged at historical low of 0.5% today..
According to an interview with First Deputy Chairman, Alexei Ulyukayev, Russia's central bank wants to increase the proportion of its international reserves held in gold, and the bank added 100,000 ounces to its reserves in January. In the meantime, gold imports in India witnessed a new surge with imports showing major gains in the beginning of the New Year. Imports of gold in January were up some 19 times to 34 tons in January as compared with 1.8 tons a year ago.
Since the beginning of February the price of crude has jumped almost 15 percent from USD 70 per barrel to USD 81 per barrel. And, even though there was a large increase in inventories, the market shrugged off these figures and continued to move higher.
On Friday the non-farm payrolls report showed a contraction in he US job market of 36k in February, less than expectation of -40k. The unemployment rate stayed unchanged at 9.7%.
Gold remained firm despite the current strength in the greenback. The Dollar index reached 80.88. However, with exploding national debt, we are going to see further currency devaluations. This, combined with strong investor demand, is setting gold up for its next move to the upside.
While some Wall Street's analysts claim China is in a bubble, I don't buy this at all. In fact, I am sure China's GDP growth will continue at 9% if not more. As China continues to transform itself into a major economic power, demand for gold, and silver for that matter, will continue to increase. It is estimated that by the year 2025 China will have more than 200 cities with a population of more than one million. And in 20 years, China's cities will have added 350 million people. That is more than the entire population of the United States. As this new consumer class emerges, the demand for gold jewellery will only increase. But, in addition, the Chinese have a good understanding of the value of gold as an investment, and this new demand is going to have a positive effect on gold.
On Thursday March 04, I happened to watch an interview on CNBC with Marc Faber. When Simon Hobbs asked why people should invest in gold, he really denigrated gold. Referring to gold he referred to the precious metal as "an inanimate object that sits in a dark damp cellar somewhere that may or may not be in short supply and may or may not glitter in the current light but really has no productive power. Isn't gold the ultimate ponzi scheme?" he asked. What a ridiculous assumption! Gold is most certainly not a ponzi scheme. It is a monetary metal that has been around for centuries. And, while it may appear to be inanimate, it has an intrinsic value that is recognized in almost every country in the world. It is a store of value and a proven way to preserve wealth. While its value depends on numerous different factors, the current environment of expansionary monetary policies, exploding national debt and global currency devaluations, are going to be very favorable for the price of gold. And, as Marc Faber stated, everyone should own this metal.
From around the beginning of February, gold has been edging upwards. While the long-term trend remains very much intact as seen by the 180 day moving average, the short-term trend looks positive. However, gold needs to break out of this consolidation pattern that began in December 2009. A key short-term sign will be a break above USD1150.
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.