By: GoldCore, Commentary by John Fisher
Gold rose to its highest level in 2010 on April 27th (highest since December 4th, 2009) and new record highs in Euros, Swiss francs and British pounds as ratings downgrades of Portugal and Greece fanned sovereign risk and contagion fears. Gold dipped to $1,146/oz early in New York before rising sharply to $1,164/oz on the downgrade news. It then saw profit taking and closed with a gain of 0.7%.
Gold is currently trading at $1,165/oz and in euro and GBP terms, at €885/oz and £767/oz respectively. Importantly, equities and commodities (including oil and copper) sold off aggressively yesterday after the downgrades sent investors out of riskier assets. Gold due to its safe haven currency status was one of the few commodities to rise.
Gold in British pounds – 1 year (daily).
Gold is rising on the growing realization that while the Greek debt tragedy may be reaching its end, we may only be in the middle acts of a wider international tragedy. Fixed income traders are beginning to price in worst case scenarios with a significant spreading of sovereign spreads. Indeed, market participants not known for alarmism are now warning that there is the potential for another Lehman style systemic meltdown. Some are even advocating the nuclear option of governments creating money in extremis in order to directly purchase government bonds on a massive scale. Given this scenario and the fact that we remain in the worst crisis since the Great Depression, investment and central bank demand is set to remain robust for the foreseeable future.
In a new Lehman style scenario gold could be susceptible to another bout of short term weakness (as leveraged players move to the sidelines) but increased safe haven demand for gold should see it recover quickly and continue to outperform other assets. In a world of continuing debt monetization, quantitative easing and currency devaluation, gold is likely to remain an important asset allocation.
Soon after Portugal’s downgrade by Standard & Poor’s gold surged (rising from $1,145/oz to $1,172.60/oz) on safe haven demand. It rose strongly in dollars but by even more in other major currencies – indeed it was strong in all major currencies except the yen which was strong yesterday despite increasing concerns about the Japanese fiscal position. Investors are increasingly skeptical of governments’ abilities to magic away the significant fiscal challenges facing sovereign nations and the very uncertain situation is benefiting gold.
Gold needs to close above resistance at $1,165/oz (which was breached yesterday but not closed above) before it can challenge the December record high at $1,226/oz (see chart below).
Gold’s recent gains do not do the severity of the Greek debt and European sovereign debt crisis justice. Indeed, it looks like there may be delayed reaction to the crisis with many markets remaining complacent about the ramifications of contagion in international debt markets. It is difficult to tell why gold has not gotten a bigger bust yet. The operative word here is likely ‘yet’. As was the case at the outset of the crisis, some bears pointed to gold’s fall in price when Bear Stearns collapsed and then Lehman’s collapsed as some kind of proof that gold was no longer a safe haven. In the fullness of time, how wrong they were. Those keeping a historical perspective and remaining patient will be rewarded.
Gold in USD – 6 months (daily) – resistance is at $1,165 and then at $1,200 and $1,226 per ounce.
Indeed the recent record (nominal) highs for gold in Euros and Swiss francs likely portend the coming of new record highs in dollars in the coming weeks.
It is hard not to like gold at this time as the fundamentals are extremely favorable. Having said that those taking speculative punts using leverage could get burnt as gold prices could fall in the short term prior to challenging the record at $1,224/oz and possibly as high as $1,500/oz later this year.
All Things Considered – John’s Commentary: This article is very balanced, neither bugs nor bears, GoldCore paints a very plausible picture. Regardless, we will see a steadily increasing, albeit volatile gold and silver market. Hang on! The reason they are called “bull” markets is that the bull does all he can to throw you off.
What to do now: Until this market breaks up or down, continue to buy in modest amounts over preset intervals (monthly, quarterly, etc.). Just keep slowly adding. Don’t give too much thought to metal price fluctuations.
What to buy now: Low Premium! Period! Do not fall for the pre-1933 “confiscation proof” bait and switch you will get from the TV, radio, internet and direct mail firms with a non-stop talking account executive. One of the cardinal rules of gold and silver buying: “When you melt it down, it all looks the same and is all worth the same”.
Quote of the day: “America today has insufficient savings to finance both crucial investment and its consumption of imports.” – James Dale Davidson
