Mexico’s proposed higher mining royalties could block nearly $7bn in investments
The Mexican government proposed raising mining royalties under the argument that metal prices have risen in recent years.
The global economy is faltering and the world’s monetary system is looking exceedingly precarious, yet the price of gold has plunged in the last week. Soon after US Federal Reserve chairman, Ben Bernanke, announced Operation Twist, a policy intended to reduce borrowing costs, global markets plunged.
The Fed’s $400 billion plan, named “Operation Twist” is the latest in a series of steps aimed at reviving an economy that has very sluggish growth and high unemployment. In this new strategy, the Fed said it intends to sell shorter-term notes and then use those funds to purchase longer-dated Treasuries. It will also reinvest proceeds from maturing mortgage and agency bonds back into the mortgage market, in hopes that it will help an already battered housing sector. Frankly, I think this latest strategy will fail miserably. You don’t have to be an award winning economist to understand that if people do not have a source of income, no matter how low the borrowing rates, they are not going to embark in making a new house purchase. And, this policy is going to do absolutely nothing to stimulate the economy and generate new jobs.
Initially the market reaction was rather muted but then in a broad-based sell off that included equities, commodities and gold, the Dow Jones industrial average dropped by 283 points or 2.49% to 11,124.84. The Standard & Poor’s 500 Index lost 35points, or 2.94%, to 1,166.76, and the Nasdaq Composite Index fell 52 points or 2.01% to 2,538.19. The selling continued for a few days as investors cut positions in equities and commodities. Evidently, when Bernanke mentioned the words ‘significant downside risks,” investors got spooked and worried that the Fed’s latest plan will have little effect on lending in an economy that appears to be stagnating, which the Fed also noted. Investors sold practically anything to turn the proceeds into cash, the biggest beneficiary being the US dollar. Can you believe that? This is a doomed currency that it is only experiencing a bounce due to the weakness in its major rival the euro.
Earlier in the same day the Bank of England signalled it was ready to inject more money into the weakening British economy, and the Norwegian central bank held its main interest rate unchanged and signalled it might refrain from rate increases for longer than previously expected due to a weaker global economy and the Eurozone debt crisis.
According to the International Monetary Fund, the European debt crisis has generated as much as 300 billion euros ($410 billion) in credit risk for European banks.
“A number of banks must raise capital to help ensure the confidence of their creditors and depositors,” the IMF wrote in its Global Financial Stability Report released Wednesday. “Without additional capital buffers, problems in accessing funding are likely to create deleveraging pressures at banks, which will force them to cut credit to the real economy.”
The IMF also cut its global growth forecast and predicted “severe’ repercussions if policy makers fail to stem the debt turmoil that’s threatening to spread to Italy and Spain.
Moody’s Corp cut the debt ratings of Bank of America Corp, Wells Fargo & Co and Citigroup Inc., saying the U.S. government is getting less comfortable with bailing out large troubled lenders. Moody’s Investors Service downgraded eight Greek banks by two notches. National Bank of Greece SA (NBG), EFG Eurobank Ergasias SA (Eurobank), Alpha Bank AE (Alpha), Piraeus Bank SA (Piraeus), Agricultural Bank of Greece (ATE) and Attica Bank SA downgraded to Caa2 from B3. Emporiki Bank of Greece (Emporiki) and General Bank of Greece (Geniki) downgraded to B3 from B1. All of the banks’ long-term deposit and debt ratings carry a negative outlook. The major shareholders of two of the banks namely Emporiki Bank of Greece and General Bank of Greece are owned by French banks Credit Agricole and Societe Generale respectively.
Meanwhile, the index of CDS on 25 banks and insurers in Europe jumped to new record high. CDS on Germany, France, Italy and Spain sovereign debt also rose to records. German two year yield dropped further to new record low of 0.25%. Major European indices reversed earlier gains and are deep in red at the time of writing while US stock futures point to another deep lower opening. Markets are in general still under much pressure.
Last week Standard and Poor’s cut its ratings on Italy by one notch, to A/A-1 from A+/A-1+ and kept its outlook on negative, sending the euro more than half a cent lower against the dollar. Under mounting pressure to cut its 1.9 trillion euro debt pile, the government pushed a 59.8 billion euro austerity plan through parliament last week, pledging a balanced budget by 2013. But there has been little confidence that the much-revised package of tax hikes and spending cuts will do anything to address Italy’s underlying problem of persistent stagnant growth.
“We believe the reduced pace of Italy’s economic activity to date will make the governments revised fiscal targets difficult to achieve,” S&P’s said in a statement.
“Furthermore, what we view as the Italian government’s tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy’s economic challenges,” it said.
On Monday September 19, yields on Italian 10-year bonds stood at 5.59%, within sight of above 6% they had reached just before the ECB intervention.
The S&P downgrade, came at a time when the world’s financial markets are on the edge, warily watching for a default by Greece with unknown contagion effects on the Eurozone financial system.
In the meantime, the South Korean central bank surprised the markets on Friday with a $4 billion lightning intervention in support of the won, carried out in the last two minutes of trading. The day before, Brazil spent $2.75 billion selling dollars in the currency swaps market to stop the rapid decline of the real. By the end of Friday, the won was still down 4.7% on the week, the Brazilian real 8.6% cent, and the Turkish lira by 3.6%.
With world markets still in turmoil, commodity prices are very volatile. The impact on many emerging economies, both exporters and importers of natural resources, will be more dramatic than on the developed world. Currencies are certain to respond.
Bankers are now bracing for a Greek default. Bankers from major financial institutions, attending a conference on the side-lines of the International Monetary Fund/World Bank sessions fear that Greece defaulting on its 340 billion euros ($459.95 billion) in government debt would trigger widespread selling of Eurozone debt causing a much broader financial crisis.
European banks are facing increasing difficulty in tapping short-term funding and Eurozone bank credit default swap spreads have doubled to about 300 basis points, and European bank stocks plunged nearly 30% since early August.
According to Reuters, Europe came under fierce pressure from the United States and other major economies at weekend talks in Washington to take swift, decisive action to stop the Greek debt crisis engulfing bigger Eurozone states and derailing world economic recovery.
If you think that the above scenario is conducive for strong economic growth and a stable currency market, then you are a true Utopian, or you have completely missed the bigger picture. Even as investors turn to cash in the short-term, will be selling pressure on all commodities and of course gold. But, when logic prevails, and when investors come out of their current coma, they will realise that all these various programs and strategies will not resolve the global debt issues, and that the world is getting closer to a major currency collapse as countries in the Eurozone struggle with problems of insolvency and not liquidity.
As gold prices fall, I have no doubt that certain major players will be entering the market as this recent selloff is viewed as a major opportunity for investors to accumulate a more substantial position. By this I mean gold bullion; the physical metal. You can do this by adding gold bullion bars and/or gold bullion coins to your portfolio. (Please don’t consider limited edition medallions or commemorative medallions as gold bullion. They are not and as far as I am concerned they have no investment value whatsoever).
It has been a long time since I have been so bullish about gold.
TECHNICAL ANALYSIS
The classic hammer candlestick pattern with the bottom of the shadow touching the 200 day moving average at $1520/oz, indicates a trend reversal. I believe that we have seen the bottom of this correction and the price will edge upwards from here.
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.
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.
