Friday, October 7, 2011

Why Gold Isn’t $2000 yet…

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By: Julian D. W. Phillips, GoldForecaster.com - GoldForecaster.com



http://news.goldseek.com/GoldForecaster/images/specialreport.jpg
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

Thursday, October 6, 2011

Gold's volatility makes a long term focus more important


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While prices have fallen significantly in recent weeks and volatility continues to rise, David Levenstein looks at what has actually changed, if anything
Author: David Levenstein
Posted:  Tuesday , 04 Oct 2011
JOHANNESBURG - 
As events are constantly changing, sometimes on an hourly basis, it is difficult to keep abreast with the latest issues.  The price of gold can change in an instant, and some of the moves can be substantial. Many of these price changes are becoming a daily occurrence. One day the price is down $50 an ounce and then before you know it, it is back up.
During this phase of volatility, it is important to keep focused on the bigger long-term picture and remind yourself why you own gold bullion. One of the main reasons we invest in precious metals, in particular gold and silver is that they are an alternative to fiat money.  If you believe as I do that the global monetary system is looking precarious and if you have doubts about the solutions suggested by our financial leaders, then it is essential to have a portion of your investment portfolio in gold and silver. Nothing has improved regarding the deteriorating state of our global monetary system, and while the current demand for US dollars is pushing the greenback higher, this cannot be sustained.
In last three weeks the US dollar has gained approximately 7% as measured by the Dollar Index, and during the same time the price of gold has dropped 16%. The reason for this sudden rise of the dollar can be attributed to a move out of global equities, commodities and certain currencies in particular the euro and into the perceived safety of the US dollar. I use the term "perceived safety" because in the long-term there is nothing safe about the US dollar.
As investors panicked when the prices of many assets plunged they simply sold everything, even assets that have medium to long-term growth opportunities. The recent selling of gold was related to panic from hedge funds needing to raise money for redemptions as well as a tightening of margin requirements. This was not selling pressure based on any fundamental change in the global gold market. And, it is important to realise that at times, price discovery has little to do with supply and demand, and has much to do with speculative trades as those transacted on the futures markets, in particular Comex.
Practically the all the trades on Comex are merely leveraged "paper" trades in gold and only a very small percent of all deals ever end in physical delivery.  And, due to the nature of leverage, the volumes can be massive but totally unrelated to the real supply and demand equation. Nevertheless, as the physical spot market and the futures market are linked to each other, the futures market can have a huge impact on the prices in the spot market. Personally, I believe that the sell-off in these futures contracts had a lot to do with the recent price fall in gold. 
When the gold price plummeted on September 23, at one time the price of spot gold was down by $122 an ounce from the daily high of $1750 an ounce. When the US session on Comex closed, spot gold was down $79/oz on the day at $1657/oz. But, what was interesting was the volumes traded on Comex. They were enormous; around 340,000 contracts...roughly equivalent to 25% of the annual production output in one session! None of these contracts will result in delivery and yet these paper trades can have a significant impact on prices. Once the speculative interest has waned and investors realise that the current global monetary crisis is not any better than it was a few weeks ago, I bet that we will see a resurgence of demand for the yellow metal.
We are experiencing the results of half a century of debt-fuelled "growth" that is becoming increasingly difficult to sustain. Banks grew so big that their collapse would have brought down the entire global economy. To prevent this, they were bailed out with huge tranches of public money, which in turn is precipitating social crises on the streets of western nations. The European Union has grown so big, and so unaccountable, that it threatens to collapse in on itself. Corporations have grown so big that they are overwhelming democracies and building a global plutocracy to serve their own interests. But now with the Eurozone debt crisis, US debt, currency wars, poor economic growth, high unemployment, the global monetary system looks increasingly precarious. While the Eurozone sets up an amicable separation from Greece, the euro remains under pressure resulting in a stronger dollar. 
Greece will run out of money to pay salaries and pensions next month unless it receives the next €8bn installment of emergency loans. European officials are scrambling to avert a Greek debt default, which could wreck balance sheets of European banks, send the euro lower and possibly plunge the world into a new global financial crisis.
Then today, Monday October 03, 2011 the Greek government said it won't meet its deficit target this year and agreed to additional austerity measures demanded by international lenders ahead of a meeting of Eurozone finance ministers. Greece's 2011 deficit is now expected to be 8.5% of gross domestic product, falling short of a target of 7.6%. The deficit will be reduced to 6.8% of GDP in 2012, but still short of the 6.5% target.
The Greek finance ministry said the targets will be missed because the nation is suffering a much deeper-than-projected recession. The economy is now expected to contract 5.5% in 2011 compared to the 3.8% contraction projected in June. The news increases the possibility of a delay of the next tranche of bailout funds. It also spooked investors who rushed to sell shares Monday in Asia and Europe.
Frankly, we all know that the situation in Greece is dire and that they have no hope to pay back any of these loans. I believe that despite the political rhetoric of government leaders, the leaders of the Eurozone are setting up for an "orderly" default by Greece due to the impossibility of Greece being able to service an ever expanding debt mountain. While their package will protect the banks from collapsing, it will also necessitate the monetization of the debts of the PIIGS meaning very simply printing more money.  As the value of the euro declines, individuals will look to preserve their savings and turn to gold.
 
TECHNICAL ANALYSIS
 
Gold prices are beginning to consolidate above $1600 level after the recent drop. I believe that this period of consolidation will not take more than a few weeks.
Source: http://www.mineweb.com/mineweb/view/mineweb/en/page103855?oid=136820&sn=Detail&pid=102055

What does 15 Trillion looks like?

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Source: http://www.sgtraderclub.com/2011/08/what-does-15-trillion-looks-like.html