The yellow metal has already made record highs in sterling and euro terms and sovereign risks continue to worry investors

Author: David Levenstein
Posted: Monday , 12 Apr 2010

JOHANNESBURG -

"Hello out there. Have you been watching the price of gold lately?" In dollar terms the gold price is now about 5 percent below its all time high, but the weakness of the pound and the euro against the American currency means that the price of the yellow metal in sterling and euros has just made new record highs. The price of an ounce of gold has thus reached record levels of £754 and €865 in recent trading, and the dollar price has reached a three-month high of $1,157. In August last year the gold price in sterling terms, for example, was £562, so British gold investors have made a profit of 34%, compared with a rise in the dollar price of 23% over the same period.

During the past week, the Euro was very volatile especially as the financial drama in Greece continued. As expected, the ECB left the main refinancing rate at 1% in April, and both growth prospects and inflation were largely unchanged from previous meetings. ECB President Trichet addressed questions about Greece's deficit problem and said that 'default is not an issue for Greece'. Although the Euro edged up higher on Friday, the trend for the week has been down.

There were a number of Central Bank events last week. Australia raised rates by 25bps to 4.25% as widely expected, and the Bank of Japan and Bank of England left rates and the quantitative easing program unchanged. The U.S. Federal Open Market Committee minutes for March's meeting unveiled the Fed's dovish monetary outlook. While forecasts of real economic activities remained largely unchanged from previous meeting, policymakers were surprised by deceleration of inflation. At the same time, the Fed noted unemployment would be undermining recovery.

Nicholas Brooks of ETF Securities, which runs exchange-traded funds, said: "The strong performance of gold, despite the strength of the US dollar, indicates that investors are increasingly viewing it as an alternative store of value, not just to the US dollar but to fiat [paper] currencies more broadly, as sovereign risks continues to rise.

"Traditionally, investors concerned about the structural outlook for the US dollar would buy euros, British pounds or yen. However, with policy and debt risks rising in all of these countries, investors - as well as central banks and sovereign wealth funds - are increasingly looking to gold as an alternative 'hard asset' store of value."

On April 8, of this month The world's largest gold-backed exchange-traded fund, SPDR Gold Trust said its holdings hit an all-time high at 1,140.433 tons surpassing an earlier record of 1,134.03 tons touched on June 1, 2009. The rise in the ETF holdings to a new record level reflects strong investor demand.

In my previous report I mentioned that the IMF had turned down a bid from Eric Sprott to buy the remaining 191 tons of gold on offer. Evidently, the IMF claimed that Sprott's desire to purchase the gold from the IMF did not comply with ‘protocol", and that the IMF only sells gold to central banks. When Sprott explained what happened, he also mentioned that "I'm a 100% believer that central banks have suppressed the price of gold. I find it hilarious today that they have these programs to sell gold - it's of no use. It's one of the dumbest decisions in the last decade."

Recently I read what I believe to be another "shocker" on gold on Commodity Online. According to the article the last real audit of the U.S. gold reserves took place in 1954. And, according to the National Inflation Association (NIA) (a rather grand sounding US pressure group), US gold reserves might not be as much as 8133.5 tons. What could be considered even more disturbing to the conspiracy theorist is that following on the story in June of 2007, when Morgan Stanley agreed to pay $4.4 million to settle a class-action lawsuit with brokerage clients who bought precious metals and paid storage fees, when it was alleged that Morgan Stanley wasn't physically storing their gold and silver at all, NIA suggests we may now have an epidemic of banks selling gold/silver they don't have and that if this isn't exposed immediately, it could bring down the world's financial system.

In September 2009 it was announced that Hong Kong was moving all of its gold reserves from depositories in London to a new facility built under the Hong Kong airport. This is interpreted by the NIA as a sign that Asian countries no longer trust the western world to manage their gold for them. "In our opinion, a COMEX and LBMA default on gold and silver is inevitable as investors around the world wake up and realize that we have a fractional reserve gold and silver system, and begin to demand physical delivery of their precious metals."

According to The Bank for International Settlements (BIS), sovereign debt is already starting to cross the danger threshold in the United States, Japan, Britain, and most of Western Europe, threatening to set off a bond crisis at the heart of the global economy. This will result in rising bond yields which in turn means falling bond prices. According to the BIS "Monetary policy may ultimately become impotent to control inflation, regardless of the fighting credentials of the central bank."

In one of my previous reports I mentioned that I believe that the only crash we are going to see is that in the financials. The only bubble about to burst is not going to be the Chinese economy nor is going to be gold but it is going to be in US Treasuries as well as UK and European bonds.

Once again, in this kind of environment, it is prudent to protect some of your assets with gold. The best way to do this may be by owning the physical metal, especially as there is more talk about the lack of physical gold and silver being kept in the various depositories especially in the USA and England. This can be done by acquiring gold coins and gold bullion bars.

TECHNICAL ANALYSIS

The price of gold recently broke through a resistance level of USD1140 as can be seen in the area encircled in blue. The long-term and short-term indicators are all positive suggesting a potential move to the upside of at least another US$60 - US$80. This will be a re-test of the previous all time high. And, I believe that we will see this shortly.

About the author

David Levenstein is an expert on investing in precious metals .He brings over 30 years experience in futures, equities, forex and bullion. David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali. The views expressed in this article are his own and not necessarily those of Mineweb.

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