As global financial conditions deteriorate, take appropriate steps to protect your wealth

While gold prices fell, global equity markets were also unable to sustain their recent moves to the upside, and Tuesday saw the DOW fall more than 200 points and the S&P was down by. Crude oil prices fell together with the price of silver, platinum, palladium, wheat, corn etc. Money flows followed the greenback as the US Dollar index showed signs of recovering after finding some support at 78.60. The EUR/USD failed to break above 1.3200

The euro fell after the announcement that Moody’s downgraded ratings on five Spanish regions. The downgrades included Catalonia to Ba3 from Ba1, Extremadura to Ba1 from Baa3, Andalucia to Ba2 from Baa3, Castilla-La Mancha to Ba3 from Ba2 and Murcia to Ba3 from Ba1. Moody’s noted that the downgrades were “driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves as of September 2012 and their significant reliance on short-term credit lines to fund operating needs.”

Even though economic conditions continue to worsen in Spain, not much attention was paid to it during the latest meeting of Eurozone policy makers. It is obvious that saving their banks and their banking system is their priority and European leaders pledged to have a Eurozone bank supervisor in place by year-end.

Evidently, the European Union (EU) leaders seemed to agree on a framework that will make the European Central Bank the main supervisor by Jan. 1 2013. The new system, intended to break the link between banks and governments at the root of the region’s financial crisis, will phase in over the next year and could cover all 6,000 euro-area banks by Jan. 1, 2014.

Following almost seven hours of talks, European Commission spokesman Olivier Bailly said there had been an “agreement on a political framework for the end of 2012 and a gradual implementation in 2013.”

However, according to certain sources, it is unlikely that the new body would begin its work from the start of the New Year due mainly to some disagreements between France and Germany.

The basic idea is that in future, struggling banks that pose a danger to Europe’s financial system could be recapitalised directly from EU bailout funds. However, this does not address any of the problems concerning economic growth or the lack thereof in debt-ridden countries in the Eurozone in particular Greece and Spain. Furthermore, it is not known if this new arrangement will have any impact on the pre-agreed financial assistance for lenders in Spain, which will have to add loans to its public debt burden.

The summit in Brussels took place amid another round of violent riots in Spain and Greece which then spilled over into the UK as protesters demonstrated against the latest government austerity plans.

In the EU post-meeting statement, the leaders praised Greece for its efforts to meet its commitments and secure its next aid instalments while French President Francois Hollande told reporters that “the worst has passed” for Europe’s sovereign debt crisis. Leaders didn’t discuss additional assistance for Spain, he said.

When it comes to Spain, banks in the country face more losses as the economy continues to contract. Although, it seemed that Spain’s banking issues were going to take centre stage at the recent summit, nothing much was discussed and the Spanish prime-minister Mariano Rajoy wasn’t prepared to make a request for a broader bailout.

Rajoy wants the euro area’s firewall to inject cash directly into its ailing banks, to relieve it of the burden of paying back as much as 100 billion euros ($131 billion) in bank- rescue loans. The prospect of direct bank rescues became less urgent after stress tests revealed that Spain’s lenders required less than half of the funds approved by euro-area states, a Spanish official told reporters in Brussels.

Spain estimated on Sept. 28 it may need about 40 billion euros to recapitalize its banks. The government has played down the necessity of seeking additional aid while pushing for progress on a European banking union.

“The direct recapitalization of banks can take place when the banking supervision process is in place and approved by the euro group,” Rajoy told reporters. “I don’t know when that will be.”

Meanwhile, according to the most recent data published by the Bank of Spain, bad loans as a proportion of total lending jumped to a record 10.5% in August from a restated 10.1% in July as 9.3 billion euros ($12.2 billion) of loans were newly classified as being in default. The ratio has climbed for 17 straight months from 0.72% in December 2006.

Spain’s request for 100 billion euros of European Union financial aid to shore up its banks is increasing concern about the nation’s growing liabilities. Standard & Poor’s downgraded the country’s debt rating by two levels to BBB-, one step above junk, from BBB+ on Oct. 10, saying it wasn’t clear who will bear the cost of recapitalizing banks.

Shortly afterwards the rating agency cut the ratings of 11 lenders including Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA), citing the sovereign downgrade.

Then, on Tuesday, Moody’s downgraded ratings on five Spanish regions which prompted some selling of the euro. The downgrades included Catalonia to Ba3 from Ba1, Extremadura to Ba1 from Baa3, Andalucia to Ba2 from Baa3, Castilla-La Mancha to Ba3 from Ba2 and Murcia to Ba3 from Ba1. Moody’s noted that the downgrades were “driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves as of September 2012 and their significant reliance on short-term credit lines to fund operating needs.”

In the meantime, during the second debate between the two US presidential candidates, Romney stated that the first thing he would do would be to label China as a currency manipulator and that he would abolish all taxes on dividends, interest payments and capital gains. I guess since the US government made Osama Bin Laden miraculously disappear somewhere over the ocean, they have to blame someone else.

To be very frank, I find this kind of rhetoric to be very misleading and could even incite racial tensions. Firstly, the Chinese never “stole” any jobs from any American. US companies established their production facilities abroad due to lower cost of labour as well as costs of production. In addition to China many American companies set up manufacturing facilities in Taiwan, Thailand, and Indonesia. This transfer of production to countries in South East Asia was in full swing during the 1990’s. By having their clothes, shoes, and electronic goods produced in these manufacturing centres, US retailers were able to make good profits and offer products at a fraction of the cost of any US producer. At the time everyone was happy. There was hardly ever any talk of China being a currency manipulator. This relationship was of huge benefit to both the US retailers and their consumers. And, while things were going gang-busters, no one complained. Now, as the economy is contracting and people are finding it difficult to find jobs in the US, the real problem is hidden and the blame conveniently put on a third party. Perhaps Romney should pay more attention to the 2,000 odd pages of Dodd-Frank rules and regulations that are so complicated nobody seems to understand them. And, these regulations only make it tremendously difficult for foreigners to do business in the United States, or with US citizens.

Of course, Romney failed to mention that the world’s biggest currency manipulator is actually the US and not China. Perhaps he is not even aware of this. And, he made absolutely no mention about China being the second largest holder of US government debt after the US Federal Reserve. Furthermore, while his idea of abolishing taxes on interest rate payments etc., may have garnered mass support, he failed to mention that since the real rate of interest rates in the US are currently around zero, he in fact is offering nothing. Yet, the average person is probably still doing backflips after hearing two words i.e. tax cuts, not realising that they have been offered nothing.

Then, Obama stated that he now has a way to guarantee economic growth. How funny because I am sure he was saying the same thing four years ago, and I do recall that one of his promises then was to get America back to work. But, anyway, as all politicians suffer from amnesia, I need not remind readers of what he said then and instead would like to consider his latest brain wave for getting the economy back on its feet. He is going to employ US veterans! While I admire this, the point is; how is this strategy going to stimulate the US economy.  Furthermore, if there are no jobs in the first place, it does not make any difference who you employ.

You may well ask what this all has to do with the price of gold. Well, ultimately political policy of the largest economy in the world has huge ramifications all over the globe. And, I believe that the hegemonic era of the US is coming to an end and the ruling elite represented by politicians cannot be trusted. And, sadly, I see this incredible nation being totally ruined by an oligarchy of political and financial leaders. The wealthier are going to be even wealthier, the financial wealth of the middle class will be conveniently redistributed and the poor will increase in numbers.

Wealth drives everything. But, unlike politicians who become exceptionally wealthy in very short space of time, national prosperity is built on a foundation of savings, economic freedom, ingenuity, and hard work… all factors that are in terminal decline in the west today.

Western governments are already technically insolvent, devoid of any net savings whatsoever. And with each passing day, they create new regulations, new taxes, and new controls to destroy any remaining economic freedom in their economies.

Asian economies are based on production and savings. Western economies are based on consumption and debt.

If you chose to put your faith in a government, then be prepared to suffer the consequences. They will not look after you. In other words, we are on our own. We cannot trust our respective governments and must take the appropriate steps to protect ourselves and to preserve the wealth that it has taken us years to build. Don’t waste your time listening to the empty promises of your political leaders. The only way to move forward is to do something to protect your wealth and liberty. Buy physical gold and silver.

TECHNICAL ANALYSIS

After failing to break above the $1800 ounce level, prices of gold have fallen below the 50 day MA. I expect to see some major support at $1700 and look to see a bounce from this level.

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.