GOLD UP-DATE
29 May 2012
Amidst the Deepening Financial Crisis in the Eurozone, Certain Prudent Central Banks Add Gold to Their Reserves.
David Levenstein
Recently, while European leaders gathered in Brussels for an "informal summit" the euro continued to plunge as fears of a Greek exit caused renewed fears about contagion in the Eurozone. Only a few days before this summit US President Barack Obama hosted a gathering of world leaders at his secluded and highly secure mountaintop retreat at Camp David. In a statement issued after the G-8 meeting, leaders agreed that they have to do something to contain the financial crisis that could spread from the Eurozone to the United States and impact on the rest of the global economy. They also declared unanimity in ensuring that Greece, which is crippled in debt and politically gridlocked, remains as part of the 17-member euro currency union.
"The leaders here understand the stakes," Obama said. "They know the magnitude of the choices they have to make and the enormous political and economic and social costs if they don't." And, in what seemed an amazing revelation, he also said that "There's now an emerging consensus that more must be done to promote growth and job creation right now."
The Group of Eight summit includes leaders of the United States, Japan, Britain, Germany, France, Italy, Canada and Russia.
It seems that the only outcome of these meetings was perhaps some indigestion from all the rich food consumed and an acknowledgement that something must be done to ease the debt crisis currently plaguing the Eurozone, but they did nothing to restore market confidence.
While these global leaders argued about growth, deficit cuts, austerity plans, increasing taxes and unemployment, the euro continued to weaken against all major currencies except the Swiss Franc. The Dollar index broke above 82 and has now gained almost 5% since the beginning of May. Most commodities came under some pressure due to the stronger US dollar, and gold managed to hold above $1570 an ounce.
Last week saw increasing speculation that Greece might be forced to leave the euro as a top European Union official said officials were working on emergency plans in case of a Greek exit. Greek depositors have been withdrawing hundreds of millions of euros from banks, with the fear being that their euros are suddenly changed to newly devalued drachma in the event that Greece does exit the euro. In this instance, whatever they had in the bank will immediately become worth a lot less. And, of course such a conversion will come by surprise.
As depositors continue to withdraw their cash from an already weakened banking system the country is facing the most acute financial crisis of the Eurozone and the entire country essentially depends upon life support from the ECB. Although there has been no official announcement, nor have any terms or conditions been disclosed, Greece's banking system is being propped up by an estimated EUR 100 billion or so of emergency liquidity provided by the country's central bank -- approved secretly by the European Central Bank in Frankfurt. If Greece were to leave the Eurozone, the immediate cause might be an ECB decision to pull the plug.
In an article published in The Financial Times, analysts at Barclays reckon Greece is now using EUR 96 billion in "emergency liquidity assistance" (ELA), with Ireland accounting for another EUR 41 billion and Cyprus EUR 4 billion. If correct, the total ELA in use has exceeded EUR 140 billion -- more than 10 per cent of the amount lent to Eurozone banks in standard monetary policy operations.
Shortly after the EU summit failed to produce any solutions, a May survey of Eurozone business confidence on Thursday showed the sharpest monthly fall for nearly three years while the data for Germany was the worst for six months and a survey in France, the poorest for 37 months.
European Central Bank President Mario Draghi said the EU was at "a crucial moment in its history" and that the debt crisis has demonstrated the EU's weaknesses.
"The process of European integration needs a courageous jump in political imagination to survive," he said, adding that while growth was a priority, "there is no sustainable growth without ordered public accounts."
The crisis in Greece has only deteriorated over the last two years. And, now it seems that Spain's financial woes are finally coming to the forefront. The moment the former Prime Minister of Spain, Jose Luis Zapatero declared on numerous occasions that Spain did not have any financial problems I knew Spain was in trouble. And, now it is evident that the country's banking system is in trouble. Only last week trading in shares of Bankia, the fourth largest Spanish bank which was nationalized earlier this month, was suspended as it became apparent that the bank requires additional funding from the government. The bank is set to ask the government for a bailout of more than 15 billion euros ($19 billion). Earlier in the month, the bank was nationalised by the Spanish government. It holds around 10% of the country's bank deposits.
In the meantime, as these financial leaders deliberate on how to save the Eurozone, several central banks have added more gold to their reserves. According to the IMF central banks around the world are continuing to buy gold, and if the trend continues there is a chance that they may buy even more this year than last. Central banks gold purchase during April included purchases from Mexico (2.9 tons), Kazakhstan (2 tons) and Ukraine (1.4 tons). The Philippines added 1.033 million ounces (32 tons) in March with gold now at 13.6% of its total reserves. This is the second largest monthly Central Bank's purchase after Mexico's purchase of 2.5 million ounces in March 2011. Turkey's gold reserves went up by 29.7 metric tons reaching 239.3 tons in April, according to International Monetary Fund data.
Another positive factor for gold is that the CME Group announced a cut in margin requirements effective 29 May. Initial performance bond requirements for speculators for gold futures will be cut from $10,125 to $9,113 while the maintenance margin will be cut from $7,500 to $6,750.
During this week, market participants will monitor the unemployment rate in April, non-farm payrolls and ISM manufacturing index in May from the U.S. and also May PMI data from China.
As bank runs and financial and economic problems continue to develop around the world, more and more people are going to be moving to the precious metals. As our monetary system has so much debt and has become so corrupt that the only way you can really protect your savings is if you buy physical gold and silver.
TECHNICAL ANALYSIS
The price of gold still remains trapped between $1500 an ounce and $1600 an ounce. However, it looks set to re-test $1600 an ounce.
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 He is also a regular commentator on www.kitco.com and www.mineweb.com 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.
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