By: Julian D. W. Phillips, GoldForecaster.com - GoldForecaster.com
The
gold price went over $1,900 and looked as though it was going to mount
$2,000, but since then has fallen back to $1,600 and is in the process
of consolidating around the lower $1,600 area. It was expected that it
would have moved a lot higher faster, but that hasn’t happened, yet.
In the face of Italy’s downgrade to A2 by the ratings Agency, Moody’s summary that,
“There
has been a profound loss of confidence in certain European sovereign
debt markets, and Moody’s considers that this extremely weak market
sentiment will likely persist. It is no longer a temporary problem that
might be addressed through liquidity support, and several euro-area
governments are increasingly affected by the loss of confidence.”
The
downgrading was expected as are further downgrades for the different
Eurozone members. Why shouldn’t the gold price be on its way through
$2,000 to higher levels?
The ‘Downturn’
The
news over the last few weeks has sent global financial markets down
heavily as a slow recovery morphed into a downturn and, at best, a flat
economic future in the developed world. These falls have been
accompanied by tremendous worries that there could be a major banking
crisis that will cripple the Eurozone economy as a whole, not just the
debt-distressed nations. In France, growth is now at zero; in Greece
it’s somewhere south of a 5% dip in growth, well into recession. Greater
austerity simply adds to the fall in government revenues, defeating
their purpose of reducing their deficit. All of this implies an ongoing
shrinkage of the Eurozone economy. This hurts investor capacities in all
financial markets and wealth throughout the Eurozone. Cash becomes
“king” as investors flees markets to a holding position, waiting for
much cheaper prices before re-entering markets at lower levels.
The
path to deflation is then made. Deflation in its early stages causes
tremendous de-leveraging. That’s the selling of positions to pay off
loans taken to increase positions. It may come about because of investor
prudence, banks calling in loans, stop-loss triggers and margin calls
(where the level of debt against positions becomes too high and forces
sales). This often (and particularly in the case of precious metals) has
nothing to do with the fundamentals of the market. It’s simply the
position of investors. This happened in the precious metal markets as
well. This is why gold and silver prices fell.
De-leveraging
As
was the case in 2008 and often through history, the process of
de-leveraging is a short-lived one, even when it’s savage. Downward
pressure on prices disappears once an investor has sold the positions.
Leveraged positions are the most vulnerable of investor-held positions
and can make up the froth or ‘surf’ in the markets, which cause the
volatility levels to increase when drama strikes. In 2008, these
positions were huge because there had been two and a half decades of
burgeoning markets that encouraged greater risk-taking. Since then,
while leveraging has taken place, it has been less and rapidly removed
when dramas hit.
In
2008 we saw a similar drop in prices from $1,200 to $1,000 [20%], which
equates to the fall from $1,910 to $1,590 [16.9%]. In 2008, the
precious metal prices then slowly rose as buyers started to come in from
all over the world. It took over a year for prices to recover back to
$1,200.
Change in Market Structure
Today
the shape of the precious metal markets is quite different and
particularly that of gold. In 2008, central banks were sellers; today
they are buyers. In 2008, the Chinese gold markets were small. Since
then they’ve grown to such an extent that they’re soon to overtake
India. These are two dynamic features that give demand a totally
different shape to 2008. More than that, the impact of the developed
world, long-term, has diminished quite considerably. It now represents
less than 21% of jewelry, bar, and coin demand. The emerging world, as a
whole, represents over 70% of such demand now.
The
bulk of the world’s physical gold that comes to the market is dealt at
the London twice daily Fixings. The balance that’s traded outside the
Fixings is the most short-term price influential amounts, producing the
swings that resemble the waves on the seashore. It’s these traders and
speculators that often persuade long-term buyers to stand back and wait
for the prices to swing to the point that persuades them to enter the
market. The drop from $1,900 had this effect on investors. Now that the
fall has happened, we see a surge in demand from the emerging world to
pick up the slack in the market. We’ve no doubt that central banks are buying the dips as well.
So
once the selling from the developed world has stopped (emerging market
demand waits for this before buying, allowing the fall to extend
further) in come the buyers happy that they’re entering the market at a
good time. Because of this change in market shape, expect the market to
take far less time to find its balance and allow demand to dominate.
2012 Recession Battle
The
I.M.F. has just warned that the developed world will enter a recession
in 2012. Will that be negative for the gold market? We don’t think so.
The world has seen the recovery peter out, the sovereign debt crisis
arrive, and now sees the I.M.F. recommend that the Eurozone banks be
recapitalized. What does this mean for precious metals?
Cast you minds back to the recapitalization of U.S. banks under the TARP measures whereby the Fed bought the toxic debt investments of the banks against fresh
money. When we say fresh we mean just that, newly created money in the
trillions. This did lower the perceived value of the dollar inside and
outside the U.S. The effect on gold was palpable as it rose back through
$1,200 and onto new highs.
Already
we’re hearing rumors of an E.U. government minister’s plan to walk the
same or similar road. With the recent past in mind, we’re certain that
will lower the perceived value of the euro and see euro investors seek
places to cling onto the value of the euro. This time round, expect
markets to discount these actions in the same way. The downturn will
therefore be fought with new money creation in the same way the U.S. did
it from 2008 on.
Source: http://news.goldseek.com/GoldForecaster/1317844522.php
