Source: Seeking Alpha- May 11, 2010
Gold: Gold has recovered from the slight sell off seen Monday and stayed above $1,200/oz in Asian trading overnight before rallying in early European trading (now trading at $1223 at 10:15 Eastern) The initial euphoria that saw stocks and the euro surge yesterday has quickly dissipated with the euro giving up most of yesterday’s gains and stocks coming under pressure this morning. Yesterday’s relief rally may have been a temporary short covering rally than anything else. There is a growing realization that the unprecedented measures being taken by the European Central Bank (ECB) may not be enough to contain the euro zone debt crisis.
Gold is looking healthy and strong at these levels and seems very likely to surpass its December 2009 record highs (over $1,220/oz) sooner rather than later. A close above $1,224/oz could lead to the next leg up in gold’s bull market with a rally to $1,400/oz quite possible given the degree of macroeconomic and monetary risk in the world. And, there is no reason to believe that this risk will not remain with us for the foreseeable future.
There are real risks that the crisis could spread to affect other heavily indebted nations such as Japan, the UK and the US. While the yen is up again today after yesterdays falls, news that the outstanding balance of Japan’s central government debt hit a record high of 882.92 trillion yen at the end of fiscal 2009 will not soothe market jitters. Nor will the horse trading taking place to create a new UK government amid concerns about the very poor UK public finances.
The euro currency is now being debased with the ECB electing to try and print their way out of this crisis by bailing out European banks exposed to the debt of the so called ‘PIIGS’. The survival of the euro remains at question and hence gold remains close to Friday’s record highs of €961.96 per ounce. The psychological level of €1,000 per ounce gold may become upside resistance.
The short term panacea of printing money has failed miserably in recent months to resolve the US financial and economic woes, as it has done historically. The real risk is that monetary expansion and quantitative easing leads to a currency crisis.
With fiat currencies internationally being debased and devalued there is a real risk of serious inflation taking off followed by much higher interest rates. Chinese inflation numbers overnight were higher than expected and as the world’s largest exporter, will likely lead to higher inflation internationally. False hope and Pollyanna thinking got us into this mess. This same thinking will not get us out.
Silver: Silver has range traded from $18.38/oz to $18.52/oz this morning in Asia and Europe. Silver is currently trading at $19.14/oz in New York (10:15am Eastern)
Commodities: Investors should expect higher commodity prices in the “near term” and favor industrial and precious metals, JPMorgan Chase & Co. said in a report. Investors should be neutral on agriculture and increase bets on higher oil prices, the bank said, forecasting a West Texas Intermediate price of $93 a barrel in the fourth quarter (Bloomberg).
All Things Considered – John’s Commentary
Action to take: Yesterday, gold pierced it’s previous upper level high of $1,226 and closed at $1,231.50/oz. It now remains to be seen if gold will find a new level of support at $1,226. Once gold builds a new base at this level, the next targets are $1,400 and $1,650. Silver will follow suit, and move up even more on a percentage basis – yesterday’s close was $19.35. Action: If you have been waiting for lower prices to “get in” or buy more, those days are gone. Gold could go lower in the short term, but trying to pick a bottom will do nothing but leave you behind. Continue to add in regular and continual amounts.
What to buy: Low premium – period! Call us to discuss what the current best buys are as things continue to change rapidly. For example, investors in Europe are fleeing to gold in the wake of the $1 Trillion ECB bailout, driving Kruggerand premiums to unusual highs.
Quote of the day: “If you’re holding paper currency, you have to have some kind of trust that the country that issued it is not just going to print its way out of its problems. That’s a real concern right now. Gold, on the other hand, has real intrinsic value, unlike a paper currency which can be debased by its government.” – Sacha Tihanyi, Currency Strategist, Scotia Capital
