The currency crisis in the Eurozone is far from being resolved, and instead may even deteriorate.
Finally, after weeks of denial and the usual political rhetoric, the details of the bailout package for Ireland have been released. On Sunday, EU governments finally approved an €85 billion ($113 billion) bailout deal for Ireland.
A statement issued said the International Monetary Fund, the 16 Eurozone nations and the European Commission will be involved. Britain, Sweden and Denmark will offer bilateral loans. The interest rate that Ireland will pay is going to be 5.8% which is higher than the 5.2% that Greece is paying on its bailout. The European Commission also granted Ireland an extra year to bring down its deficit to within the EU limit of 3%.
After the news was announced, the euro hardly reacted, but then later in the day, it fell to the lowest level in more than two months against the dollar as Ireland's agreement to receive 85 billion euros ($112 billion) in aid failed to stem concern that Europe's sovereign-debt crisis will deepen. The question now is whether Sunday's agreements will relieve the pressure in the markets, or whether the markets are going to keep pushing Portuguese and Spanish risk measures higher and force a near-term bailout of at least Portugal and perhaps Spain. Credit default swap prices on Monday rose by 23 bps for Spain and by 40 bps for Portugal. By looking at these record high rates, one can assume that investors are not reassured that the current crisis is anywhere near resolved and there is talk that Spain will require around 350 billion euros in aid.
Last Friday, Ireland's banks suffered a string of credit downgrades on Friday. The New York based Standard & Poor's credit ratings agency said it was lowering Anglo Irish Bank six notches to a junk-bond B grade. It also cut the ratings on Bank of Ireland one notch to BBB+, and downgraded both Allied Irish Banks and Irish Life & Permanent one notch to BBB. The agency said bonds issued by Anglo are particularly at risk of being discounted as part of an €85 billion, or $113 billion, loan to Ireland by the European Union and the International Monetary Fund. It says Ireland "may be forced to reconsider its current supportive stance toward Anglo's unguaranteed debt." Anglo Irish was nationalized last year and represents a bill to the taxpayer of at least €29 billion. Shortly afterwards, another ratings agency, Fitch in London, said each Irish bank soon "could face negative rating action" depending on whether Ireland's deal with EU and IMF negotiators seeks to inflict sacrifices on senior bondholders. Fitch trimmed its ratings on the lowest-level securities issued by Bank of Ireland and Allied Irish Banks to various grades of junk. Fitch said it "believes that the prospects of enforced burden sharing for (subordinated) debt holders is much more likely, although still not certain."
In addition to the countries of Ireland, Portugal, Greece and Spain, Belgium faces an important test as it aims to sell between 1.5 billion euros ($1.9 billion) and 2.5 billion euros worth of bonds in an auction that will indicate the level of investor confidence in the nation plagued by political turmoil and high levels of debt. Since the June elections, politicians have struggled to form a new government and the prospect of new elections is looming. If Belgium does not succeed in forming a government soon to reduce the budget deficit through fiscal austerity and bring down its debt, the country could end up in the same situation as the PIIGS nations. Last week, credit default swaps linked to Belgian debt – indicating the cost of insuring Belgian debt against default – rose to a record high this week.
In its latest report on Belgium, rating agency Standard & Poor's wrote that its AA+ rating on the country's long-term debt – the second-highest rating at the agency – could come under downward pressure if a continued political stalemate were to diminish the authorities' capacity to address the "outstanding challenges".
With no federal government in place to draw up a new budget, S&P fears the country will not be able to reduce its deficit through a series of austerity measures and bring down its debt. Public debt is just under 100% of gross domestic product, the third-highest in the European Union, with only Italy and Greece preceding it, EU data showed.
In the meantime, renewed political tensions in the Korean peninsula are adding to the support of gold. Analysts believe that prices for the yellow metal are likely to remain highly volatile as tensions on the Korean peninsula drive the dollar to a two-month high, eroding demand for the metal. Last week Korea fired over 200 artillery shells at a South Korean island and there was an exchange of fire. Later in the week, North Korea warned that they're "greatly enraged at the provocation" from South Korea, and any "escalated confrontation", including planned US-South Korea naval exercises, would bring the peninsula closer to war.
Personally I doubt that we will see any escalation of the current scenario even though we will hear an increase in verbal accusations and threats from various government officials. Once again, investors rushed back into the US dollar as a safe haven investment and the greenback broke through a key resistance of 80 that indicates that a near-term bottom has been posted at 75.60. However, I am not optimistic about the dollar and even if we see the dollar rally higher, I believe it will ultimately resume its downward move to my medium-term target of 72. Once again, and as I have reiterated many times in the past, this flood into dollars is senseless. There is nothing strong about the dollar at the moment and as far as I am concerned, even though it is the world's reserve currency, it is faltering. And, it will continue to decline in value during the course of 2011.
Last Tuesday, China and Russia renounced the US dollar and have agreed to use their own currencies for bilateral trade. Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced this when they met for 15th time. The Chinese yuan has already started trading against the Russian rouble on the Chinese Interbank market and the yuan will begin to trade on the Russian forex market this December. While it is unlikely that the move will have little impact on the dollar, it does go to show how major economies are losing faith in the world's reserve
For several years I have been talking about the coming currency crisis which has already begun and the effect that this is going to have on the price of gold. While we are all entitled to our own opinions, I can't see any improvement in the debt crisis plaguing the Eurozone, and as a consequence, I expect to see a further decline in the Euro. Then, I expect to see further declines in the US dollar once the current rally comes to an end. This will push the price of gold higher and through the previous high of $1425 an ounce. I have also long advocated that investors should have a portion of their investment portfolios in physical metals, in particular gold. If you do not own some gold bullion, I suggest you begin to accumulate some of this metal as soon as possible.
The upward trend in gold prices remain intact and well above the long-term 200 day MA. I believe prices are consolidating above $1325 (S1) and we will soon see an upward surge to retest the historical high. Although some people are suggesting that the price pattern is looking very much like a head-and-shoulders pattern, I would like to say that there is no point in trying to predict a possible pattern. Prices could easily pull-back and then move upwards before such a pattern forms.
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.