Download The fundamentals that have been driving the price of gold are still

MAIN TOPICS
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Gold prices hold above $1600 an ounce.
Greece fails to meet deficit target.
BoJ, ECB, BoE keep rates on hold.
Italy downgraded.
Moodys downgrade Llyods and RBS.
10 October 2011
Since September 26, the price of gold has been consolidating between $1600 and $1655 an ounce. On the one side
we have seen selling pressure come from the futures markets in particular Comex, and on the other side we have
seen insatiable demand for the physical gold come from China and Asia.
While many individuals continue to debate the cause of the recent sell-off in gold, I am absolutely certain that there
is a great deal of truth to the commentaries that suggest that this sell-off was engineered by central banks and
their agents the bullion banks, in an attempt to thwart the upward momentum in gold and thus take the spotlight
away from gold.
In a blatant attempt to drive the price of gold down, some large sell orders came onto the futures market during
the time when the market was least liquid. You have to ask the question, why would anyone sell at the most illiquid
times? The seller was obviously determined to move the market in the direction they wanted and was not
interested in the least in attempting to liquidate at the best possible price. Then, as the prices of equities,
commodities and most currencies plunged, it appears that certain hedge funds that were taking a beating in their
stock positions used the profits made in gold and silver to cover those losses. This added to the downward
momentum. The cherry on the top of the cake was the action taken by the CME. They hiked the margin for gold by
21% and in a falling market!! Yet, while the S&P plummeted, the CME reduced margins for this contract by 33%!
And, interestingly, although the price of gold tumbled, very few buy orders for physical gold were actually filled at
the lower prices.
The fundamentals that have been driving the price of gold are still intact.
While the recent volatility may prolong a recovery in gold prices, the same underlying fundamentals that have been
driving the prices higher, are still in place. These forces include a generally-weak U.S. dollar, a potential default in
Greece as well as with some European banks, a more “accommodative easing” from the ECB that will result in a
further decline in the euro, more stimulus from the US Federal Reserve, and — more recently — fear of a
global currency collapse. These are all bullish for gold, and not one of these factors is set to disappear anytime
soon.
During last week, there was enough market news that under normal circumstances would have driven the price of
gold much higher. Earlier in the week, the Greek government said it won’t meet its deficit target this year and
agreed to additional austerity measures demanded by international lenders ahead of a meeting of euro-zone
finance ministers later on Monday. Officials from the troika — the European Union, European Central Bank and the
International Monetary Fund — have been in Greece to decide on the disbursement of the next tranche of aid to
Greece. The money is sorely needed to help Greece avoid a default on its obligations in coming weeks.
Greece’s 2011 deficit is now expected to be 8.5% of gross domestic product, falling short of a target of 7.6%. The
deficit will be reduced to 6.8% of GDP in 2012, but still short of the 6.5% target.
The Greek finance ministry said the targets will be missed because the nation is suffering a much deeper-thanprojected recession. The economy is now expected to contract 5.5% in 2011 compared to the 3.8% contraction
projected in June.
The news spooked investors who rushed to sell shares and buy US dollars. It appears that as investors panic, they
still turn to the US dollar. While it may offer some safety in the immediate short-term, I don’t see the strength in
the US dollar continuing for much longer.
As widely expected the BoJ left rates unchanged at 0-0.1% on a unanimous vote. The bank also maintained its JPY
50 trillion scheme to buy securities and boost liquidities. The RBA left the cash rate unchanged at 4.75%. Yet the
post-meeting statement came in more dovish than the previous one. And, the ECB left the main refinancing rate
unchanged at 1.5% in October. However, a series of liquidity provision measures, including LTROs, MROs and the
most awaited covered bond purchases program, were announced.
As far as the new covered bond purchase program (CBPP2) is concerned, the purchases amount will be 40 billion
euro, with the capacity to be conducted in the primary and secondary markets and will be carried out by means of
direct purchases. The purchases will start in November 2011 and are expected to be fully implemented by the end
of October 2012.
The ECB also remained cautious towards the economic outlook due to 'intensified downside risks'. Moreover, 'ongoing tensions in financial markets and unfavourable effects on financing conditions are likely to dampen the pace
of economic growth in the euro area in the second half of this year'.
At the press conference, Trichet said that ECB considered that it would not be appropriate for the central bank to
leverage the EFSF. Policymakers considered that 'governments themselves have the capacity to leverage the EFSF'.
In the meantime, the Bank of England announced an increase in the asset purchase target by £75 billion to £275
billion, the first increase since November 2009. The base rate was left unchanged at 0.50%. This was broadly in
line with general consensus, but most market participants thought the Bank of England would wait until November
before announcing more quantitative easing.
The BoE expects the Gilt buying to take about four months to complete and it will keep the bond plan under review.
It is expected that this move will drive UK rates even lower and weaken sterling during this period.
Rating agency Fitch downgrades Italy from AA- to A+
Fitch downgraded Italy's creditworthiness from AA- to A+, citing high public debt, low growth and the "politically
technical and complex" solution necessary to fix Italy's financial ills and earn back the trust of investors. "The
initially hesitant response by the Italian government to the spread of contagion has also eroded market confidence
in its capacity to effectively navigate Italy through the Eurozone crisis," Fitch said.
The move came after Moody's Investors Service downgraded Italy's bond ratings to A2 with a negative outlook
from Aa2. On September 19, Standard & Poor's cut Italy's long- and short-term sovereign credit ratings one notch,
though its rating is still five steps above junk status. Fitch also cut Spain's sovereign debt rating by two notches to
AA- from AA+, citing increased risks from the Eurozone financial crisis as well as high debt in regional governments
and weakening growth prospects.
Like Italy, Fitch kept a negative outlook on Spain, but said it expected the country to remain solvent. It says that
debt reduction efforts will weigh on growth and keep unemployment high. Spain currently has the Eurozone's
highest jobless rate at over 20pc.
As banks across Europe attempt to recapitalize and trim the losses from their bad investments in high yielding
government bonds, Moody's downgraded part-nationalised banks Lloyds and Royal Bank of Scotland on Friday,
although George Osborne said UK banks were well-placed to cope with a European debt crisis.
The cuts to RBS and Lloyds formed part of a broader downgrade of 12 British financial companies by Moody's,
which had already been flagged by the agency earlier in the year.
Moody's cut RBS by two notches to A2 from Aa3, and downgraded Lloyds TSB by one notch to A1 from Aa3. It also
cut its ratings on Santander UK, the Co-Operative Bank, Nationwide Building Society and seven other smaller
British building societies.
Moody's did not change its rating on Barclays and HSBC, which along with RBS and Lloyds represent the "Big Four"
group of lenders that dominate British banking.
Earlier this week, France and Belgium intervened to prop up European bank Dexia, whose financial strength had
been eroded by the sovereign debt turmoil.
As far as I am concerned, the banking sector in the UK and Europe looks increasingly fragile and will only be saved
by a continuation of an expansionary monetary policy from the central banks. As I have alluded to countless of
times, this term simply means that the banks will print more money. And, the consequence of this will be a further
debasement of currencies and a higher price in gold.
TECHNICAL ANALYSIS
The price of gold continues to consolidate between $1600/oz and $1655/oz.
About the author: David Levenstein is an independent precious metals market commentator with more than 30 years’ experience.
© 2011 all rights reserved.
Information contained herein has been obtained from sources believed to be reliable, but its accuracy cannot be guaranteed.
Any opinions expressed herein reflect judgements at this date and are subject to change without notice.