Gold & Silver Market Morning

By: Julian D. W. Phillips, Gold/Silver Forecaster - Global Watch - GoldForecaster.com

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-- Posted Thursday, 22 November 2012 | Share this article | Source: GoldSeek.com

Gold Today –New York closed at $1,729.20 up $1.50 on yesterday.  This morning, Asian and London dealers took the gold price higher to trade at $1,729.70 ahead of London’s opening. It was Fixed at $1,729.75 up $3.00 on yesterday morning’s Fix. In the euro it was Fixed at €1,344.226 down €6.5 from yesterday while the euro was stronger at €1: $1.2868. Ahead of New York’s opening, gold was almost the same at $1,730.25 and in the euro at €1,343.73.

Silver Today – As gold rose slightly silver moved with it closing at $33.33 yesterday, in New York. It then traded at $33.35 until, ahead of New York’s opening it stood at $33.30.

Gold _{(very short-term)}

Gold is expected to consolidate with a stronger bias, in New York today.

Silver _{(very short-term)}

Silver is expected to consolidate with a stronger bias, in New York today.

Price Drivers

Gold & Silver – We will give you a break from our daily ‘soapie’, the Eurozone crisis today and clarify that central banks keep on buying gold with Brazil adding 17.2 tonnes or 50% to its holdings in October. In addition, Turkey’s central bank increased its bullion holdings by 17.5 tonnes, Kazakhstan’s by 7.5 tonnes, and Russia’s by 0.4 tonnes. Since 2009 other central banks from the emerging world have been steady buyers of gold but, wisely, only when offered decent quantities in the market place from the bullion banks, usually as the prices dipped. They do not chase prices or let themselves become ‘visible’ in the market place.

But Germany sold 4.2 tonnes in October. This must not be confused with lowering its holdings as a result of a policy decision. Every year it sets aside 7 tonnes of gold for the minting of gold coins. This has been a constant policy over time and will continue to be in the future. When Axel Weber was the Bundesbank President and Germany was offered the opportunity to sell 600 tonnes under the Central Bank Gold Agreement allocations, Germany refused with Herr Weber saying that “gold was a useful counter to the swings of the dollar”. Since then the gold price has risen nearly 50% in price and apart from this year’s allocation to coins Germany has sold no gold.

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Over in the States, more and more investors are turning positive on gold, with Merrill Lynch joining their ranks and forecasting gold over $2,000. While U.S. demand is not a main driver of the gold price they have added to world demand in recent weeks by buying into the funds that buy physical gold against shares they issue. Perhaps the cheapest and most liquid way to enter the gold market, these funds are designed to accommodate various types of funds that were barred from owning physical gold in the past. When they buy they hold long-term. Their current total holdings at over 2,000 tonnes are larger than China’s.

Silver – Silver is moving up in sync with gold but may well outperform it.

Regards,

Julian D.W. Phillips for the Gold & Silver Forecasters

Global Gold Price (1 ounce)
	Today	3 days ago
Franc	Sf1,619.08	Sf1,623.84
US	$1,730.25	$1,726.30
EU	1,343.73	€1,348.46
India	Rs.95,536.62	Rs.95,145.89

-- Posted Thursday, 22 November 2012 | Digg This Article | Source: GoldSeek.com

Bundesbank Sold Gold "Just for Commemorative Coins", Silver Industrial Demand Forecast to Rebound in 2013

By: Ben Traynor, BullionVault

-- Posted Thursday, 22 November 2012 | Share this article | Source: GoldSeek.com

London Gold Market Report

THE U.S. DOLLAR gold price traded close to $1730 an ounce during Thursday morning's London session, holding onto gains made a day earlier, as European stock markets edged higher, with US markets closed today for Thanksgiving.

"We believe that the German Bundesbank's sale of 4.2 tonnes of gold was intended solely for producing commemorative coins," says today's commodities note from Commerzbank, referring to International Monetary Fund figures published Wednesday showing October's buying and selling of gold by central banks.

"By its own account, the Bundesbank keeps 7 tonnes of gold ready each year for the production of coins, gold which it sells to Germany's Federal Ministry of Finance. In October 2011, the Bundesbank had sold 4.7 tonnes of gold for this purpose."

Silver hovered below $33.50 an ounce this morning, like gold holding gains from Wednesday, as oil prices ticked lower and copped gained.

Industrial demand for silver is forecast to rebound next year following an estimated 6% drop in 2012, according to a report by precious metals consultancy Thomson Reuters GFMS published by the Silver Institute.

"This will owe much to a new peak in China," the report says, "while a jump in the Indian market will see the country post its second highest total on record."

Industrial demand accounted for more than half of total silver demand last year, with that share projected to grow to around 60% in 2014, according to GFMS.

China's manufacturing sector has shown improved activity this month, according to the provisional release of HSBC's purchasing managers index published Thursday. HSBC's flash PMI rose 50.4, up from 49.5 a month earlier, with a figure above 50 indicating an expanding sector.

In Europe meantime, flash PMI data published by Markit show improved manufacturing conditions in both Germany and the Eurozone as a whole this month, although the sector PMIs remains below 50.

Increasing the European Union's budget would be "quite wrong" said British prime minister David Cameron this morning as he arrived in Brussels ahead of a summit that will see discussions of the EU's budget over the rest of this decade.

Cameron's coalition government lost a parliamentary vote at the end of last month when members of his Conservative party joined opposition Labour in backing calls for an outright cut in the EU's budget rather than just a freeze.

"[Cameron's] people expect the impossible," says Tim Bale, professor of politics at Queen Mary University of London.

"That's the problem, they want him to fail. They don't want him to bring back the deal that can possibly be done, because that will prove [Britain] can't deal with the EU and the only solution is to get out of it."

The Euro extended yesterday's gains this morning following reports that Euro members could contribute an additional €10 billion to temporary bailout fund the European Financial Stability Facility in order to fund Greece while it waits for international lenders to agree payment of its latest tranche of bailout funding.

Argentina meantime must $1.3 billion to hedge funds that did not agree to the country's sovereign debt restructuring in 2001, a US court ruled Wednesday.

Judge Thomas Griesa has issued an injunction against Argentina, adding that this extends to "other persons who are in active concert or participation with the parties or their agents."

This includes Bank of New York Mellon, which is trustee for Argentina's restructured debt, and extends to the US payments system, the Financial Times reports.

A ship from Argentina's navy was seized in Ghana last month following an application by a subsidiary of US hedge fund Elliot Capital Management, one of the holdouts from the 2001 default.

India's government is examining the creation of financial investments linked to gold, such as gold-backed bonds, the Hindustan Times reports.

"Recent [central bank] data showed a declining trend of savings by Indian households including bank deposits," an official from India's finance ministry said, "[so] in order to attract household savings, paper products that are linked to gold [should] be developed." 

Ben Traynor

Austrian Parliament Hears 80% of Austrian Gold Bullion Reserves In London

-- Posted Thursday, 22 November 2012 | Share this article | Source: GoldSeek.com

Today’s AM fix was USD 1,729.75, EUR 1,344.23, and GBP 1,084.35 per ounce. 
Yesterday’s AM fix was USD 1,726.75, EUR 1,350.71, and GBP 1,085.05 per ounce.
Gold inched up $1.50 or 0.09% in New York yesterday and closed at $1,729.20. Silver surged to a high of $33.378 and finished with a gain of 0.51%. Gold is now some 1% higher for the week and silver nearly 3% higher for the week and higher weekly closes will be bullish from a technical perspective.

 

Cross Currency Table – (Bloomberg)

Gold priced in Japanese yen rose to a nine-month high this morning at 143,262 yen/oz and is on track for its biggest weekly rise since February, up 2.8% according to Reuters.

The yen came under heavy pressure from growing speculation that the Bank of Japan would aggressively ease monetary policy in the coming months.

Gold trading is quiet with the US markets closed for the Thanksgiving holiday today and the early close tomorrow.

Given the degree of uncertainty in the world - from the Middle East to Greece and the Eurozone debt crisis to the US fiscal cliff – most traders will be reluctant to take sizeable positions long or short and lacklustre, directionless trading may continue.

However, any of these risks could lead to a sudden spurt of safe haven buying that leads to gold eking out gains this shortened week.

The Austrian central bank keeps most of its 280 metric tons of gold reserves in the United Kingdom, Vice Governor Wolfgang Duchatczek was quoted as saying in the finance committee of the country’s parliament today, according to Bloomberg.

Answering lawmakers’ questions, Duchatczek said 80%, or 224.4 metric tons of the metal was stored in the U.K., 17% or 48.7 metric tons in Austria and 3% in Switzerland, according to a summary of a closed-door committee meeting provided by the parliament.

The reserve has been unchanged since 2007, Duchatczek was quoted as saying. The central bank has earned 300 million euros ($385 million) over the last ten years by lending the gold, he said.

Goldman Sachs is bullish on silver in 2013 and believe it will rise in price.

Silver is seeing strong investment demand due to high inflationary pressures, monetary easing and low interest rates, Goldman Sachs said in a note on silver stocks.

High silver prices in recent years have led to increased supply from mine production and old silver scrap.

Goldman noted that world silver supply grew by just 2.2% in 2012, driven by a 3% gain in mined production and a 1% increase in scrap supply.

Gold Prices/Fixes/Rates/Vols – (Bloomberg)

Gold is poised to rise above $2,000/oz next year according to Merrill Lynch Wealth Management.

They are wary of industrial metals and say that the lack of clarity on demand outlook and policies in China dim prospects for industrial metals.

NEWSWIRE

(Bloomberg) -- German Household Heating Oil Stockpiles Rise to 59.5% in October

German household heating oil tanks were 59.5 percent full last month, compared with 58.4 percent in September, according to data from Ipsos Loyalty GmbH.

Commercial inventories were at 41.6 percent in October, down from 43.8 the previous month, the data showed. Germany is Europe’s largest market for heating oil.

(Bloomberg) -- Gold Futures in Shanghai Rise; Silver Futures Reach 6-Week High

June contract gains as much as 0.5% to 353.26 yuan/gram on the Shanghai Futures Exchange. Contract trades at 353.05 yuan at 9:02 a.m. Singapore time, climbing for the third time in four days. Jan-delivery silver advances as much as 1.4% to 6,938 yuan/kg, most expensive since Oct. 12. Cash bullion of 99.99% purity increases 0.4% to 347 yuan/gram on the Shanghai Gold Exchange; vols. were 3,541 kg yesterday vs. 4,227 kg on Nov. 20

(PTI) -- Reliance Money targets Rs 2 trillion gold market with new plan

Targeting an estimated Rs two lakh crore unorganised (rpt) unorganised gold market in the country, Reliance Money today launched a new daily gold accumulation plan under which customers can invest as low as Rs 1,000 per month. Under the plan, named Reliance My Gold Plan, the customer can invest a minimum of Rs 1,000 per month and the company would use the money for purchase of gold on a daily basis and the total accumulate funds can be redeemed for gold coins or jewellery at the end of the investment tenure.

The plan was launched here today in association with the World Gold Council as its marketing partner.

 (Bloomberg) -- Reliance Money, World Gold Council Start Gold Investment Plan

The plan allows for a minimum investment of 1,000 rupees, says Vikrant Gugnani, chief executive of broking and distribution business at Reliance Capital Ltd.

Investors can opt for investment period of 1 to 15 yrs, Compulsory delivery of physical gold, no transaction tax.

Silver Spot $/oz, 2 Years – (Bloomberg)

Asian Metals Market Update

By: Chintan Karnani, Insignia Consultants

-- Posted Thursday, 22 November 2012 | Share this article | Source: GoldSeek.com

·         Technically gold, silver, copper and crude oil are bullish

General market conditions

Gold and silver have managed to trade over $1720 and $3300 this week and look headed for big gains. Chinese manufacturing expansion in November should be bullish for base metals. News from Europe and handling of the US fiscal cliff will be the key. There is no news for a sell off in gold and silver and traders will prefer to remain long than short. Investment demand of gold in India should rise as prices are near historical highs. 14 carat purity gold jewelry is now easily available in India and we expect this to shift to 8 carat purity levels when Indian gold prices surge past Rs.45000 per ten grams. We expect Indian gold prices to rise to Rs.52000 per ten grams in the next four years.

Trading strategy for the very large traders and high risk traders

COMEX GOLD: Buy around $1726 stop loss $1708 for $1755+ or buy over $1738 for $1747-$1767

NYMEX CRUDE OIL: Buy on dips with a stop loss below $84.00

COMEX TECHNICAL VIEW

COMEX GOLD DECEMBER 2012 – current price $1732.00

Bullish over $1728 with $1742.20 and $1764.70 price target

Bearish below $1722 with $1715.10 and $1695.40 as price target

Neutral Zone between $1722.00-$1728

Break point: $1738.6

• Gold can rise to $1755 and $1767 as long as it trades over $1722
• There will be a technical break down only below $1722

NYMEX CRUDE OIL (1^ST CONTRACT)  - current price $87.73

Bullish over $87.60 with $90.50 and $92.20 as price target

Bearish below $85.90 with $83.70 and $80.36 as price target

Break point: $87.60

• Crude oil needs to break $90.50 for further gains.
• At higher prices there will be buyers only if crude oil trades over $90.50

Disclaimer: Any opinions as to the commentary, market information, and future direction of prices of specific currencies, metals and commodities reflect the views of the individual analyst, In no event shall Insignia Consultants or its employees have any liability for any losses incurred in connection with any decision made, action or inaction taken by any party in reliance upon the information provided in this material; or in any delays, inaccuracies, errors in, or omissions of Information. Nothing in this article is, or should be construed as, investment advice. Prepared by Chintan Karnani

Disclosure: Insignia consultants or it employees do not have any trading positions on the trading strategies mentioned above. Our clients do have positions on the trading strategies mentioned in the above report.

Trade without emotions

"Print this report only if absolutely necessary. Save Paper. Save Trees."

NOTES TO THE ABOVE REPORT

PLEASE NOTE: HOLDS MEANS HOLDS ON DAILY CLOSING BASIS

PLEASE USE APPROPRIATE STOP LOSSES ON INTRA DAY TRADES TO LIMIT LOSSES.

APPROPRIATE STOP LOSSES PER LOT IN US DOLLARS ON THE TRADING CALLS GIVEN IN THIS REPORT

COMEX GOLD – $15-$17

COMEX SILVER: $25-$30

COMEX COPPER: $3

NYMEX CRUDE OIL: $0.60

SPOT SILVER: $0.25

SPOT GOLD: $15-$17

THE TIME GIVEN IN THE REPORT IS THE TIME OF COMPLETION OF REPORT

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-- Posted Thursday, 22 November 2012 | Digg This Article | Source: GoldSeek.com

Monthly Charts Clarify Prognosis for Gold & Silver

-- Posted Wednesday, 21 November 2012 | Share this article | Source: GoldSeek.com

By Jordan Roy-Byrne

We’ve been surprised at the recent action in the precious metals complex. During the recent correction the shares were showing quite a bit more strength than the metals. Then the shares took a dive below support yet the metals maintained their recent lows! How do we interpret this wild volatility in the relationship between the shares and the metals? Quite often we look at daily and weekly charts. Now is the time to take a look at the monthly charts which can help us get a better read on the larger trends at hand.

The monthly chart of Gold shows the yellow metal in a very healthy consolidation between $1550 and $1800. Gold’s current retreat from $1800 has lasted two months. Back in 2009, Gold brokeout to a new all-time high in the seventh month of its consolidation. Presently, Gold’s bollinger band width is at a multi-year low and its three-month volume average is at a two year low. Also, the RSI has bottomed and made a higher low. Even if Gold touched $1600, it would remain in healthy position for a breakout in 2013.

 

Gold’s companion Silver is currently trading in a tighter consolidation with $35 as resistance and $27 as support. Note that Silver has tested and held above $27 six times in the last fifteen months. Silver also held above the rising 40-month moving average which supported the market in 2009 and 2010. The RSI has also made a higher low and volume has trended down during the past seven months. 

 

Meanwhile, the gold stocks (HUI) look weaker than the metals. Momentum hasn’t confirmed its bottom as the market is in a clear range from 400 (support) and 525 (resistance). Note the current 11% decline in the HUI for the month while Gold and Silver are still in positive territory. Nevertheless, if and when the HUI prints a monthly close above 525, this chart would like quite bullish and general sentiment would certainly pick up.  

The evidence argues that the bottoms remain well intact and the metals are consolidating before the next breakout which entails Gold breaking $1800 and Silver $35. However, these breakouts are by no means imminent. Since we are dealing with monthly charts that means potentially three or four more months of consolidation. Furthermore, sentiment data such as the COT structure and public opinion polls need some improvement before the market could sustain a breakout. Thus, more consolidation could be the order of the day for the metals.

Continued consolidation in the metals also helps explain recent weakness in the HUI, which is simply testing the lower half of its own consolidation. The shares see the weakness in the overall market and perhaps sense that an immediate breakout in the metals is unlikely Furthermore, while central banks have put themselves in position to act they haven’t actually done anything yet. When the market senses their action it will likely mark a final low within this consolidation.

The good news is the metals remain in fine shape and so to do most of the mining equities we follow. If we are indeed correct that the metals and shares will remain range bound then your task is simple. Prepare yourself for further consolidation by having your buy list ready and then be ready to act when the time comes. A wise friend once told me that in a bull market the goal is to accumulate positions at the lowest prices possible. With mining equities trading well off their highs, now is the time to do your research and find the companies that will lead the next leg higher and outperform the gold stock sector.

Mining Morocco

David Bond

 

The Wallace Street Journal

Ouarzazate, Morocco – Its beaches fronting the Atlantic and the Mediterranean on the northwestern coast of Africa, the constitutional Kingdom of Morocco is a cacophony of colour. 

Ouarzazate (pron. Wa-za-ZAT), a city of a million and half or so, is Africa's Hollywood, the taking-off point for film-makers who want to tell a pictorial story of desert life, in movies such as Lawrence of Arabia, The Man Who Would Be King, Asterix and Obelix, Kingdom of Heaven, and Babel, to name a few. 

If you've ever seen a movie about World War II with desert in the background, it was probably shot out of Atlas Studios here near the casbah. Stone buildings the colour of the nearby mountain rocks rise majestically from this place. Vineyards and orchards and villages that predate the New Testament cling to verdant hillsides.

Morocco is a Muslim country, and it is a kingdom – albeit a constitutional monarchy. But you hear the words Muslim and Africa and kingdom in the same sentence, no doubt you're tempted to run like the wind. You shouldn't. It's a mellow, spectacular place where the men drink locally-made wine and women drive cars, vote, earn educations and hold high offices. It is governed by King Mohammed VI, who is still in his forties. Renault and Nissan build cars here.

Morocco escaped the so-called Arab Spring and its violence precisely because King Mohammed VI understands his country's demographics. Young unemployed males, when they've nothing to do, no money to earn, no pride to claim, are naturally going to go crazy. They are despondent and who can blame them? So they blow up an airliner in exchange from some honyock imam's promise of a better afterlife.

So the king and his elected parliament have put the kids to work. The youth are building freeways and real city infrastructures. You can sail from Casablanca on the coast to Marrakesh in the Atlas Mountains in three hours over smooth, concrete-paved freeways, and in another three hours you're in Ouarzazate. Morocco is gently corrupt. Blast through a speed-trap, the fuzz pull you over, you negotiate the fine, pay in cash, and you're outta there. No court appearance. No mark on your permanent record.

One thing Morocco is doing is opening up its prodigious silver, gold, lead, zinc and copper mineral deposits to foreign exploration and development. 

Mining has been a staple of the Moroccan economy since Biblical times: mining's current contribution to the country's GDP is north of 10 per cent, primarily from its state-owned, export-intensive potash/phosphate mining. The country will fill, according to a North Carolina State University study, between 80 per cent and 90 percent of global phosphate demand through the next two decades.  

Fouad Douiri, Minister of Energy, Mining, Water and Environment for the Kingdom of Morocco, told me his country is open for business when it comes to metal mining. “Morocco has a promising mineral potential, significant expertise, and a skilled and inexpensive labour force. We have undertaken a series of actions and reforms aimed at further promoting this vital sector through the encouragement of the private sector,” Douiri said.

(Morocco ranked 17th in world silver production in 2011, according to the Silver Institute. The primary source of its silver output is the 5.48-mil/oz/year Imiter mine, ranked as the world's 14th-largest silver producer. But there are many more coming on line, including Canadian junior Maya Gold & Silver's Zgounder silver mine, discovered in the third century AD.)

Maya's CEO, Guy Goulet, a delightful French-Canadian chap, observed on our trip through the Atlas Mountains: “Today, there are one or two Canadian exploration companies down here. Next year there will be two dozen.” I improperly overheard from others that mining billionaire Tom Kaplan, new owner of the Sunshine silver mine, is one of the tire-kickers.

Morocco has a unique and enduring relationship with the United States. It was the first nation to recognize U.S. sovereignty, in 1777, and the Moroccan-American Friendship Treaty is the United States' oldest, signed in 1786 by Thomas Jefferson, John Adams and Sultan Muhammad III. The treaty granted Moroccan cover to the fledgling U.S. merchant marine service under attack from Libyan pirates launched from the infamous Barbary Coast.

The U.S. and Morocco entered into a free trade agreement on June 15, 2004. Shares in Morocco's mining companies have traded on the Casablanca Stock Exchange since 1929.

Morocco ducked the violence of Arab Spring, and hasn't sent any shoe- or underwear-bombers our way. It's because when the young men of Morocco are blowing up silver-bearing rocks for a decent living, they don't feel the need to blow up buildings, airliners and themselves.

Mining to the rescue, once again. People didn't crawl through 1,000 miles of broken glass to get a tan on Coeur d'Alene Lake 120 years ago. They came here to work and to find wealth. That should be a lesson for the current nose-picking architects of our own economic woes and the authors of the desperation of our youth.

Is a Carbon Tax a Done Deal for the US?

-- Posted Wednesday, 21 November 2012 | Share this article | Source: GoldSeek.com By Marin Katusa, Casey Research We know Obamarama is going to tax the rich, but I bet many didn't think he would weasel in the carbon tax as quickly as he is going to now. A Romney win would have been bullish for coal producers in the US – but Romney lost, and now so has coal, at least in the near term. The biggest winner from Obamarama? Natural gas. Exxon Mobil Corp (XOM) is now supporting Obama in bringing a carbon tax to the US. Why would Exxon – and other big energy companies – join forces to bring on the carbon tax? The answer is simple: profits. Exxon has made significant purchases, buying unconventional North American gas companies. For example, it recent bought Canadian firm Celtic Exploration for over C$2.5 billion. Let's not forget that a couple of years back, Exxon bought out XTO Energy for over US$30 billion. How much pull does Exxon have in Washington, DC? Exxon has one of the largest lobbying groups on Capitol Hill. And how ironic: Exxon is also one of the largest holdings for all of the US Congress members. Exxon has always had clout in Washington and always will. Exxon is one of the former Rockefeller oil companies... one that has now positioned itself as one of the dominant unconventional North American companies. How does a carbon tax benefit Exxon? Natural gas and coal race neck-and-neck when it comes to electricity generation in the United States. By increasing the cost to produce coal, natural gas becomes more attractive for utilities. This means a better bottom line for Exxon… and a fatter paycheck for its executives. But why unconventional natural gas in the United States? First off, it's hard for a company as large as Exxon to find deposits that will move the needle on its production meter. Unfortunately for Exxon, most of the world-class deposits that it is looking for are in regions where US companies like it have lost their advantage. For example, in Russia and former USSR states, Exxon has to now play by Putin's rules, which could change at any minute. South America has also proven to be very dangerous for American companies. Chevron has just had US$18 billion worth of assets seized in Argentina. Before that, Chávez in Venezuela taught Shell and Exxon about doing business in Venezuela. Nationalization drives also followed in Bolivia and Ecuador. All this means is that there are fewer places companies like Exxon can go to make a consistent return on an investment without insane political risk. Obama isn't dumb; he knows that just taxing the rich won't be enough to fill the deficit gap in the United States. A carbon tax would help both financially as well as politically: Obama would look like a hero standing up to the "dirty polluters," as well as bring in another US$100 billion in revenues. Coal, both metallurgical as well as thermal, is already suffering: metallurgical coal prices are down because of lower demand in Europe and Asia, while thermal coal is down because of pricing pressure from natural gas and the success of shale gas. A carbon tax would be a knockout blow to the thermal-coal industry in the United States. With the backing of Exxon, expect Obama to not only bring in a carbon tax, but to do it a lot quicker than anyone has expected – and he will be viewed as a hero by many for doing it. Is your portfolio positioned to benefit from this coming change? It had better be. If not, you can learn how to get it in shape – and also get in on the energy super-bull that's forming. -- Posted Wednesday, 21 November 2012 | Digg This Article | Source: GoldSeek.com

Debt Crisis Solutions are Leaving Investors Behind

By: Ben Traynor, BullionVault

-- Posted Wednesday, 21 November 2012 | Share this article | Source: GoldSeek.com

How the losses are being paid for...

IT USED TO BE taken for granted that you could put aside some money and earn enough interest to be better off than when you started.

As the world continues to struggle with the aftermath of an enormous credit boom and its subsequent bust, though, this kind of objective seems hopelessly naïve. Events in Europe and the US this week are the latest reminder of this. To see why, let's start with a riddle:

If I owe you €10,000, and the amount of money I have is zero, is it possible to let me off the hook without you taking a loss?

The question is rather silly, yet it is analogous to the one facing policymakers in Europe right now as they decide what to do about Greece. 

Here's the problem in a nutshell: Greece was tasked with reducing its debt-to-GDP ratio to a 'sustainable' 120% by 2020 (by complete coincidence the ratio for the Eurozone's biggest debtor Italy at the time the target was set last year). That wasn't not enough time, Euro politicians decided last week, so they extended the deadline to 2022.

Christine Lagarde, managing director at the International Monetary Fund, was not happy about this. She would rather see the deadline stay as 2020, with the debt being reduced directly by further write downs. Germany and other Euro members are averse to this since it would impose further losses on creditors. Private sector Greek bondholders were burned back in February, compelled to take losses as part of a restructuring deal.

A further write down might also hit the European Central Bank, which has already agreed to forego profits on its Greek bonds. If the ECB takes actual losses, would this not amount to central bank financing of government debt – something prohibited by European treaty? According to Germany, it would.

So we have a problem where a debtor cannot pay and creditors don't want to take a hit (and in the case of the ECB may not legally do so, many argue). Naturally the first maneuver is to give the debtor a bit more time, which is exactly what Eurozone politicians did last week.

This will only achieve so much though. The latest figures show the Greek economy is still contracting; policymakers will have to buy an awful lot of time if Greece is to pay down the debt through economic growth alone.

So what else can be done? This is where the people at the top are yet to reach agreement. One of the suggestions doing the rounds is to lower the interest rate Greece pays on its bailout loans, a classic move to lower the real, inflation-adjusted value of debt.

Just ask Ben Bernanke. In a speech given this week the Federal Reserve chairman reiterated the need to maintain loose monetary policy for the foreseeable future.

"A highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens," he said.

Bernanke also repeated his call for US lawmakers to sort out the deficit, arguing that monetary policy can only provide a supportive environment; it cannot solve fiscal problems. Not the Bernanke is a deficit hawk:

"Even as fiscal policymakers address the urgent issue of longer-run fiscal sustainability," Bernanke said, "they should not ignore a second key objective: to avoid unnecessarily adding to the headwinds that are already holding back the economic recovery."

In other words, the US government should maintain borrowing near record levels, while also trying to get borrowing onto that sustainable path.

It's a tricky balance, but Bernanke seems confident America's politicians can pull it off:

"Fortunately, the two objectives are fully compatible and mutually reinforcing. Preventing a sudden and severe contraction in fiscal policy early next year will support the transition of the economy back to full employment; a stronger economy will in turn reduce the deficit and contribute to achieving long-term fiscal sustainability. At the same time, a credible plan to put the federal budget on a path that will be sustainable in the long run could help keep longer-term interest rates low and boost household and business confidence, thereby supporting economic growth today."

He may be proven right. But whether he is or not, that "accommodative" policy of below-inflation interest rates is here to stay. 

That should give continued support to the gold price. The chart below is from a presentation by Charlie Morris, head of global asset management at HSBC, given at last week's London Bullion Market Association annual conference:

Morris points out that when the annual real rate of interest (i.e. how much you make adjusted for inflation) has been below 2%, gold has tended to do well:

Many investors today would be happy with a real return of flat zero – at least they wouldn't be losing ground.

As the world grapples with the plight of sovereign debtors, though, the idea of getting a reliable real return from an investment is sadly starting to seem rather out-of-date. Moody's downgraded France this week; here's one of the reasons it gave in its ratings rationale:

"...unlike other non-euro area sovereigns that carry similarly high ratings, France does not have access to a national central bank for the financing of its debt in the event of a market disruption."

In other words, if France could just print what it owes, it could probably still be rated triple-A. Creditors would get back the money they lent out, and there would only be the small matter of it being worth a lot less than when they lent it.

That is today's reality. It may be unavoidable given the sheer size of the debt problems affecting much of the globe; but it's a pretty raw deal for those trying to grow or even hang onto the value of their savings.

Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics. Ben writes and presents BullionVault's weekly gold market summary on YouTube and can be found on Google+

(c) BullionVault 2012