Download The price of gold falls below $1600 an ounce.

MAIN TOPICS
 Gold falls below $1600/oz.
 UK triple A rating slashed.
 US Fed has tripled balance sheet in 4
years.
 Eurozone economy remains in the
doldrums.
25 February 2013
The price of gold plunged below $1600 last week mainly due to the US Federal Reserve’s Federal Open Market
Committee minutes from its latest meeting at the end of January. Although prices began to slip ahead of the release
of the minutes, the selling accelerated after the minutes hinted that the Fed could possibly end its QE3 debtmonetization campaign sooner rather than later.
The price of gold falls below $1600 an ounce.
As the price of gold fell below the $1600 an ounce level, it came under pressure from heavy liquidation by hedge
funds, banks, short sellers, technical and momentum traders which in turn caused some nervous longs to be stopped
out through stop loss orders. As usual, most of the selling occurred on Comex, and much of the selling was related to
chart weakness.
As the price of the yellow metal breached a series of major support levels, gold market sentiment turned the most
negative that we have seen in recent years. The ratio of sell orders to buy orders was the highest it has ever been in
recent days. And, as the price looked set to hit $1550 an ounce, many retail buyers who are very nervous about the
outlook for gold and concerned about the risk of further price falls, lost their nerve and sold. Typically, this type of
action suggests that we are very likely close to the bottom of this move.
Another strong sign that the price of gold is due for a rebound are the momentum indicators such as the RSI or
relative strength index which is less than 20; strongly suggesting that spot gold is deeply oversold.
While, prices of gold have plunged in the short-term, and as I have stated countless times, these sharp price declines
do not reflect the real fundamentals which include a European and coming UK, U.S. and Japanese debt crises’, global
currency wars and the real risk of recessions and a depression.
Only last Friday, Moody's Investor Service cut its triple-A rating on the United Kingdom because of a weak growth
outlook and the country's rising debt burden. Moody's lowered its rating on the U.K.'s domestic and foreign-currency
government bond ratings by one notch to Aa1 from Aaa. The outlook is stable. Explaining the main reason for the
downgrade, Moody's said "the UK's economic growth will remain sluggish over the next few years due to the
anticipated slow growth of the global economy and the drag on the UK economy from the on-going domestic publicand private-sector deleveraging process”.
While the price of gold fell sharply when the minutes of the US Fed’s last meeting were released, it is highly unlikely
that the U.S. Federal Reserve will cut back on their bond-buying stimulus program even though some officials are
concerned that the purchases could fuel an asset bubble or inflation if pushed too far.
Since 2008, when President Obama was elected, the official net public debt of the US federal government has
increased by $5.5 trillion. That is more than double the size of the total net public debt of the US in 2007 when it
was ($5.0) trillion. The total net debt of the US government has exploded to more than $11 trillion, or roughly 80%
of GDP.
In the meantime, The Fed has more than tripled the size of its balance sheet since 2008 to around $3 trillion through
a series of bond buying programs and it opted in January to keep purchasing assets at an $85 billion monthly pace
until the labour market outlook improved substantially.
Despite the trillions in bail outs and stimulus programmes, the U.S. economy still appears stagnant and the
unemployment rate remains close to 8%.
And, despite growing confidence that Europe is managing its debt crisis and is poised to embark on a recovery, fresh
developments on Friday indicated that the region continues to struggle to stimulate growth while cutting spending to
pare deficits.
The Eurozone economy likely to contract in 2013.
According to a top European official, Eurozone economy is likely to shrink for the second consecutive year and that
countries like France and Spain will miss fiscal targets meant to ensure the stability of the common currency.
The economic doldrums could set the stage for ripple effects for the United States, particularly in the financial
markets.
Olli Rehn, the European commissioner for economic and monetary affairs, forecast growth across the 27 nation
European Union of just 0.1% this year and a contraction of 0.3% among the 17 countries in the euro zone.
In another sign of continued weakness in the financial system, European banks plan to repay less than half the
expected amount of low-interest loans they took from the European Central Bank.
The central bank lent more than 1 trillion euros ($1.33 trillion) in two operations in December 2011 and February
2012. The cheap loans provided a life raft for the region’s banking sector, which ran into difficulty during the debt
crisis. During the period of uncertainty, banks refused to lend to one another. Late last month, banks paid back 137
billion euros of the loans, more than expected, suggesting that at least some banks were able to raise money on
their own.
But on Friday, the central bank said that banks that took the second round of loans planned to return 61 billion euros
in the latest repayment, much less than many had expected.
In Spain, the commission said it expected unemployment to hit 26.9% up from 25% last year. In Greece, the
forecast was for unemployment to leap to 27 % from 24.7% a year earlier.
Even in Germany, which is expected to grow this year by 0.5%, unemployment was seen nudging up slightly this
year, to 5.7% from 5.5% in 2012.
While the mainstream media is reporting an economic turnaround, I am not convinced. And, as Federal Reserve
Chairman Ben Bernanke is trying to create the illusion of wealth by pumping money into the system, the average US
citizen is having a tougher and tougher time as the cost of living is higher relative to their salaries. Furthermore, the
economy is not growing and unemployment remains elevated.
The misguided perception that things are improving may induce some people to liquidate their gold holdings, but the
prudent investor who is able to read between the lines, understands this current price drop does not alter the longterm picture.
TECHNICAL ANALYSIS
Since October 2011, this is the fourth time that the price of gold has breached the support level of $1600/oz. In each
of the previous breaks, the price has soon recovered. I expect this to happen again.
About the author: David Levenstein is an independent precious metals market commentator with more than 30 years’ experience.
© 2013 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.