Which US presidential candidate does gold prefer?
Gold loves chaos and should be hitting new highs, especially with inflation coming down and with it, two rate cuts likely before year’s end.
Euro-denominated gold extended its gains to hit a fresh record high on Monday as growing concerns over the Eurozone debt crisis fuelled interest in the metal as a haven from risk while pressuring the euro sharply lower against the dollar. Gold priced in euros almost hit €1110 an ounce after trading as high as €1,104.15 an ounce late Friday. Spot gold traded a hair from $1560 an ounce on Monday as top EU finance officials gathered for an emergency meeting in Brussels to discuss Greece’s debt crisis, galvanised by the growing threat of contagion to Italy, Portugal, Spain and Ireland.
Contagion from Greece is spreading to Spain and Italy, countries with EUR 6.3 trillion of public and private debt between them. Yields on Italian 10-year bonds hit a post-EMU high of 5.3% on Friday. On Monday, July 11, Spanish yields punched even higher, through the danger line of 5.7% to hit 6% for the first time since 1997. French banks alone have $472 billion of exposure to Italy and $175 billion to Spain, according to the Bank for International Settlements.
Although the Greece situation was temporarily resolved last week, concerns about contagion continue to plague the markets as the financial crisis spreads to the peripheral countries of the Eurozone. While the main focus remains on the euro, the poor job data from the US was also deeply disappointing, and once again raised doubts about the economic recovery in the US and the state of the US dollar.
The ECB raised the main refinancing rate by 25 bps to 1.5%, the highest level since March 2008. At the press conference, Jean-Claude Trichet, the ECB’s president expressed some concern about the momentum of economic recovery and stated that inflation rates will likely stay above 2% in coming months. Trichet was adamant that the ECB would endeavour to prevent faster inflation and brushed aside warnings that tightening at this delicate juncture might push Spain and Italy into the danger zone. He insisted that every Eurozone country stands to lose if the ECB fails to anchor price stability. Inflation risks “remain on the upside”, he said, using coded language that opens the door to further rate rises. Although the central bank did not signal when the next rate hike will be, Trichet’s comment that ‘it is essential recent price developments do not give rise to broad based inflation pressures over the medium term’ indicates that a further rate hike later this year cannot be ruled out.
Moody’s Investors Service downgraded the credit rating of Portugal to Ba2, or junk after issuing a four-notch downgrade on Portugal’s rating. The ratings agency expressed concern about the growing risk of a second round of financing before it can return to the private market.
The problems facing Portugal come as Greece, another flailing European nation, continues to worry international markets about possible default on its debt. Like Portugal, Greece was also told to cut its budget deficit sharply, but has been unable to do so. Portugal is aiming to cut the deficit to 5.9% of gross domestic product this year, from over 9% in 2010, and then to 3% by 2013.
The other ratings agencies Fitch Ratings and Standard & Poor’s Ratings Services have each recently cut the country’s ratings. They currently rate Portugal at BBB-, which is the lowest investment-grade level and two notches above Moody’s new rating.
Moody’s said the latest downgrade was driven by an increasing probability that Portugal will not be able to borrow at sustainable rates in the capital markets in the second half of 2013 and for some time thereafter. Such a scenario would require further rounds of official financing, Moody’s said.
Although Portugal’s rating indicates a much lower risk of restructuring than Greece’s Caa1 rating, which is several levels further into junk, the European Union’s evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private sector participation could become a precondition for additional lending to Portugal in the future as well.
“This development is significant not only because it increases the economic risks facing current investors, but also because it may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access to sustainable terms,” Moody’s wrote.
Moody’s also expressed concerns about the country’s ability to fully achieve the deficit reduction and debt stabilization targets Portugal set out in its loan agreement with the European Union and International Monetary Fund due to “formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.”
Ireland’s credit rating may be cut to junk by Moody’s Investors Service after Portugal lost its investment grade rating, according to analysts. Moody, which slashed Portugal to Ba2 from Baa1, in April lowered Ireland’s credit rating to the lowest investment grade Baa3 and left country’s outlook on negative. Ireland has been locked out of markets since September, and the yield on 10-year Irish bonds climbed to 12.44%, a record high since joining the European Union.
In one year, the problems in the Eurozone have deteriorated significantly. And, as far as I am concerned, a year from now they are going to be even worse. This can only have a detrimental impact on the euro. As in the case of individuals in Greece who have been buying gold, I expect more and more people in the Eurozone to diversify into the yellow metal during the coming months. This will push the price of gold through its recent all-time high and establish another record price. But, as we watch the euro crumble, the US dollar will fall as well.
Employment in the U.S. hit its worse level in nine months, dousing hopes the economy would regain momentum in the second half of the year. The non-farm payrolls rose only 18,000, the weakest reading since September, the Labour Department said on Friday, well below economists’ expectations for a 90,000 rise. The unemployment rate climbed to a six-month high of 9.2%, even as jobseekers left the labour force in droves, from 9.1% in May.
The report shattered expectations the economy was starting to accelerate after a soft patch in the first half of the year and could prompt the Federal Reserve to consider further action to help the economy. As the worlds’ bankers and leading politicians continue to deceive the public with their meaningless rhetoric and as the fragility of the current fiat monetary system worsens, I strongly urge individuals to add gold and silver to their investment portfolios. The price of gold is a barometer for the state of the monetary system; the higher it goes the worse the condition of the monetary system.
Gold prices rebounded strongly during the week and now are trading back above the medium-term 50-day MA. The recent pull-back to $1475 and the subsequent price action suggests that a bottom has been posted at $1475/oz. A break above $1550 would suggest that a new move to the upside has begun.
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.
