Mining’s old guard needs strong medicine
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Gold prices hit their highest level today since June 06, as the price surged by almost $20 an ounce. Finally, the price has broken above the key resistance of around $1625 and out of its three-month range. It now looks set to test the $1650 an ounce level, another level of key resistance.
As the price of the yellow metal punched through the $1625 an ounce level, buy stops were initiated, fuelling the rally as some traders on the short side were forced out of the market. While much of the current rally is due to mounting speculation that global central banks are going to be forced to act, many market participants are anticipating the minutes of the Federal Reserve’s August policy meeting later in the week, pondering over how close the U.S. central bank may be to implementing another round of stimulus measures.
In the meantime, yields on Spanish and Italian debt have fallen fractionally even though in Spanish banks’ bad loans jumped to a record high in June. Data from the Bank of Spain published on Friday showed that nonperforming loans grew by €8.39 billion ($10.37 billion) in the month of June, to €164.36 billion, or 9.42% of total outstanding loans compared with 8.95% in May. The previous high for bad loans was recorded in February 1994, when they peaked at 9.2% of total loans.
The data also showed that deposits shrank by 6.59% compared with a year earlier, the steepest annual decline on record, reflecting how hard-hit Spaniards are burning through their savings and that capital flight from Spain is intensifying.
Capital outflows from Spain more than quadrupled in May to €41.3 billion ($50.7 billion) compared with May 2011, according to figures released by the Spanish central bank.
In the first five months of 2012, a total of €163 billion left the country, the figures indicate. During the same period a year earlier, Spain recorded a net inflow of €14.6 billion.
The outflow has resulted from domestic banks sending money abroad, foreign lenders pulling out cash and mostly non-resident investors dumping Spanish assets. Over the last 11 months, funds equivalent to 26% of gross domestic product exited the country.
Provisions on loan losses and write-downs on real estate assets have seen many Spanish banks’ profits drop sharply in the first half of the year.
Europe-wide, bad loans held by banks have doubled since the start of the financial crisis in 2008, leaving 1 trillion euros as non-performing, according to a study by Price Waterhouse Coopers.
Today, Spain’s borrowing costs dropped, but not enough to suggest markets believe the country’s finances are on a sustainable path. And, even though Prime Minister Mariano Rajoy revealed new spending cuts and tax hikes worth 65 billion euros ($80 billion) over the next 2-1/2 years last week, financial market are still concerned about whether Spain can avoid a full-scale sovereign bailout and maintain the yield of the 10 year bond below the crucial 7%. Nonetheless, at today’s auction the yield on the 12-month bill was 3.918%, down from 5.074% last month, and the yield on the 18-month bill was 4.242% compared with 5.107% at the previous auction in June, right after Spain sought a bailout for its ailing banks worth up to 100 billion euros.
For the moment, Greece has lost its spot on the centre stage in this on-going financial drama, and a worsening of the fiscal problems in Spain has pushed this country to the centre of the euro crisis.
Meanwhile, interest rates of the so called “safe- haven” debt instruments such as US Treasuries have been driven down thanks to US Federal Reserve’s monetary policies. Last week, the yield on the 10 year bond jumped to close at 1.816%. And, the yield on the 30 year yield rose to close at 2.934%. Obviously, the higher yields will have an impact on the other currencies versus the greenback and in turn gold.
Last year the US Fed introduced Operation Twist that has been instituted in two parts. The first ran from September 2011 through June of 2012, and involved the redeployment of $400 billion in Fed assets. The second will run from July 2012 through December 2012, and it will encompass a total of $267 billion. The Fed announced the second phase of Operation Twist in response to continued sluggish growth in the U.S. economy.
The idea is that by purchasing longer-term bonds, the Fed can help drive prices up and yields down (since prices and yields move in opposite directions). At the same time, selling shorter-term bonds should cause their yields to go up (since their prices would fall).
Operation Twist was the third in a series of major policy responses by the Fed in response to the financial crisis of 2008. The first was cutting short-term rates to an effective rate of zero. That rendered the central bank unable to use further rate cuts to spur growth, so its next step was to make open-market purchases of longer-dated US Treasuries and mortgage-backed securities. The Fed then conducted two rounds of quantitative easing, which market-watchers dubbed “QE” and “QE2.” Shortly after QE2 concluded in the summer of 2011, the economy began to show signs of renewed weakness. Rather than immediately opting for a QE3, the Fed responded by announcing Operation Twist.
Despite, all sorts of interventions and expansionary monetary policies from the central banks the latest economic data has tended to confirm that GDP growth in many industrialised nations has continued to contract. Furthermore, unemployment rates have increased. And, while inflation does not seem to be a concern at the moment, it will take several months before the higher prices of foodstuffs filter into the system.
However, what is most apparent is that during the last four years, many banks and financial institutions have been saved from total collapse. And, stopping Greece from exiting from the Eurozone has nothing to do with solidarity and has everything to do with saving Greek creditors – European banks – that knew about the risks they were taking when they decided to buy Greek bonds two years ago.
Nevertheless, I cannot see any possibility for any GDP growth for at least another two or even three years. And, instead, I believe we will see a further contraction in GDP growth in many industrialised nations. This means that the only solution is money printing by the global central banks. And, the next time this happens it is going to be a large coordinated programme between the Fed, ECB, BoJ and BoE and other central banks.
This will result in a further debasement in the value of the major fiat currencies, a drop in bond prices, and an increase in yields. This will send gold prices much higher and above their previous historical highs reached last year.
TECHNICAL ANALYSIS
Today the price of gold broke above the key resistance level of $1625 (KR).This is the first time since June. As the price gathers further upward momentum they are yet to break above $1650 an ounce.
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.
