Hedge funds slash bullish wagers on gold before war jitters
Speculators have reduced net-long positions by 3.6%.
After making recent record gains, the price of gold tumbled by around $40 an ounce on Friday. Most markets reacted to rumours that China is likely to hike interest rates in order to cool growth and inflation which topped 4.4% year-on-year in October. This prompted a broad global sell-off in equities and commodities and 3% seemed to be the magic number. Practically all commodities dropped by more than 3% on Friday. The sell-off impacted the prices of gold, silver, platinum, palladium, oil, natural gas, wheat, corn, soybeans and sugar that lost more than 11%.
Even if growth in China moderates slightly, the underlying fundamentals that have been driving the gold price will not really change. At the moment, gold is reacting to a combination of issues which are the debasement of the US dollar, more currency volatility as well as instability possibly leading to an all-out currency war, future inflation and the possibility of a sovereign default.
The euro fell sharply on rumours that Ireland is on verge of a EUR 80 billion bailout from the EU and IMF. The yield on Irish 10 year government bonds made record highs beyond 9%. Irish Finance Minister Brian Lenihan said that the high borrowing costs created a “very serious” situation. But the finance ministry denied the rumour. This probably means that in reality they do require a bailout. It seems that all these finance ministers and central bankers attended the same school where they learned how to deceive the public. Only weeks before Greece was bailed out the Prime Minister George Papandreou stated very clearly that Greece was in no need of any financial assistance. But, as we all now know this was utter nonsense.
As previously mentioned, I find the notion of the US dollar being a safe-haven investment totally incongruous. What is safe about the US dollar when it has lost more than 35% of its value in the last 10 years and is about to lose more of its value in the next ten years? And, what is most alarming is the extent to which certain politicians misguide the unsuspecting public with their deceitful and fraudulent statements. I recall watching Bernanke testify at a congressional hearing where he clearly stated that he had no intention of monetizing any part of the US debt. And, now the Federal Reserve has introduced a new round of quantitative easing to the tune of $600 billion over the next eight months to help stimulate the economic recovery. But, what is quantitative easing? In my books it is nothing more than monetizing debt. And, in simple terms what this really means is that the Fed is pumping newly created money into the system in a desperate attempt to try and keep the rapidly failing U.S. fiat currency system from collapsing.
Last week at the G-20 summit held in Seoul, U.S. Treasury Secretary Timothy Geithner insisted that Washington would never resort to weakening the dollar to encourage economic growth. “The U.S. will never do that,” Geithner claimed in an interview with CNBC. “We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy.” (That’s funny because the entire world noticed how the dollar fell in value relative to most other currencies immediately after QE2 was introduced. Perhaps Geithner is looking at his charts upside down. I suppose what he said was the same as saying, “we will never kill you, but we will strangle you to death.” Now, I get it. The Fed never intended to weaken the US dollar, and the fact that the dollar did weaken was not foreseen and the rest is simply “collateral damage.” Who are they trying to kid?
And, After the G20 failed to reach any consensus on currency issues and trade imbalances, President Obama accused China of deliberately keeping its currency undervalued saying the renminbi “is undervalued … and China spends enormous amounts of money intervening in the market to keep it undervalued.” However he didn’t say much about the US Fed’s $600 billion “quantitative easing” plan.
Even before the start of the G20, Germany’s finance minister, Wolfgang Schauble called U.S. policy “clueless,” while foreign ministers from China and France (among others) questioned the wisdom of QE2. And, adding fuel to an already heated debate over the U.S. Federal Reserve’s bond-buying spree to revive the economy, former Fed Chairman Alan Greenspan said the United States was pursuing a policy of weakening the dollar.
Frankly I don’t think the US has a case when it comes to debating the debasement of currencies. And, in a recent GATA publication, Michael Pento, senior economist at Euro Pacific Capital, said. “The U.S. is the No. 1 currency manipulator on the planet.” He also said. “We print up a lot of dollars” and “we can consume more than we produce because of that.” But that policy makes for a “chronically weak” dollar and puts America at the mercy of its foreign creditors, Pento says, restating a warning about the risks of a true dollar crash and skyrocketing interest rates if we don’t change course, soon.
It won’t happen overnight, but China is plotting its own exit strategy by slowing rolling its Treasury holdings into the short end of the curve, he says, suggesting other foreign investors will follow suit.
Once again the G-20 meeting was probably nothing more than a waste of time as efforts to resolve currency and trade imbalances floundered. China rejected policy prescriptions that fault its exchange rate regime and directed criticism at monetary easing in the U.S. “Don’t make other people take the medicine for your disease,” Yu Jianhua, a director general at China’s Ministry of Commerce, told reporters in Seoul late yesterday. “Quantitative easing will have a very big impact on developing countries including China.”
“The Chinese can’t help but think this is just a way of continuing to point the finger at China,” said Neil Mackinnon, an economist at VTB Capital Inc. in London and a former Treasury official. “It doesn’t look as if we’re going to see anything specific or substantive that will address global imbalances.”
The G20 leaders released a communiqué after the summit in South Korea, pledging to achieve ‘strong, sustainable and balanced growth in a collaborative and coordinated way’. However, financial ministers’ refusal to join the US in pressuring China to appreciate the renminbi signals currency and trade disputes will persist for some time.
With politicians performing an unbelievable charade regarding the state of the world’s monetary system, as an investor you have to realise that governments are trying to mislead you. And, in times like this, it is important to have gold as part of your investment portfolio. Gold’s value as a store of wealth never changes.
TECHNICAL ANALYSIS
Frankly, I think the sell-off in gold on Friday, November 12 was overdone. However, it is possible that traders are targeting the support level of $1326 which coincides with a Fibonacci retracement of 38.2% as well as support from the medium term 50 day MA. As in the past, I think any correction will be short-lived.
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.
