Barely a week after financial leaders and leading politicians of the Eurozone were supposed to agree on a plan to help solve the problems in the Eurozone, credit rating agency Fitch has claimed that in the absence of a 'comprehensive solution', the crisis will persist and likely be punctuated by episodes of severe financial market volatility that is a particular source of risk to the sovereign governments of those countries with levels of public debt.
It reaffirmed France's top-notch triple-A rating but even here said the outlook was now negative over a longer term.
Of particular concern is the absence of a credible financial backstop. In Fitch's opinion this requires more active and explicit commitment from the ECB to mitigate the risk of self-fulfilling liquidity crises for potentially illiquid but solvent Euro Area Member States, Fitch said.
It put Belgium, Spain, Slovenia, Italy, Ireland, and Cyprus on negative watch. Recently Standard and Poor’s warned 15 of the currency bloc's 17 members they were close to a downgrade.
As investor sentiment quickly wanes and as concerns about European debt resurfaces, in the short-term I expect to see a move out of the euro and into the perceived safety of the US dollar. And, as the value of the greenback gains against the euro, we can expect to see the price of gold come under pressure. Soon, it will be the dollar that will lose value against the euro. These fiat currencies are in serious trouble. The thing is central bankers will agree that these currencies all decline in value at roughly the same rate so that their strategy of debasement is not easily seen. Simply put, the problems in the global monetary system are only getting worse.
The underlying problem of the 2008/9 financial crisis has never gone away. And, in the last three years we have seen an explosion in debt. Eventually creditors will have to resign themselves to very significant losses, probably through money printing and devaluation, but possibly default. It is inconceivable how banks are allowed to distort their financial figures so as to avoid a possible collapse. This is simply financial deception on an unprecedented scale. And, as major bond holders, they will have to come to accept the truth which is their bonds are worthless. Greek debt has already been written down to twenty-five cents to the dollar if it trades at all.
As more governments struggle to find enough money to pay their creditors, we can expect to see a series of desperate measures, such as increased taxes, newly invented taxes, exchange controls and of course additional money printing. And, in some countries I have no doubt that retirement savings will be forcibly re-directed into government bonds. Of course the moronic masses will be beguiled into believing by their political leaders that buying government bonds is the correct thing to do.
Understanding the very simple axiom that it is the people who create wealth and the government that destroys it may motivate you to doing something for yourself. In a financial collapse, your government is not going to be there for you, that I promise. And, while I hope we do not have a complete meltdown in the global monetary system, I strongly suggest that you prepare for such an eventuality.
Despite the tumble in the price of gold during the last week, my unwavering bullish view remains as solid as ever. Of course there is no denying the fact that gold prices have fallen around $300 an ounce since they recorded their all-time high in September when the price traded above $1900 per ounce. But, as I have mentioned countless of times, it is important to make a distinction between trading (short-term) and investing (long-term).
Trading is not investing. Trading is a short-term thing. You enter a position with the expectation of exiting it quickly. That can be anywhere from 30 seconds to 3 months depending on your strategy. Investing is a longer-term process, generally lasting years. In order to trade successfully you need a trading plan. You need to know your entry and exit levels as well as your stop-loss levels. And you must understand the arithmetic of trading.
Typically, traders use leveraged instruments such as futures contracts. When you trade you need to be aware of the arithmetic of leverage, and an understanding of this leverage—and how it works is absolutely essential to an understanding of futures trading.
If you speculate in futures contracts and the price moves in the direction you anticipated, high leverage can yield large profits in relation to your initial margin deposit. But if prices move in the opposite direction, high leverage can produce large losses in relation to your initial margin deposit. Leverage is a two-edged sword. For this reason it is essential to monitor your open positions constantly. As an investor on the other hand, the short-term fluctuations should only be used to add to or accumulate more of the item you invest in. Investors are looking to the long-term which is can be anything from 3 years to 5 years or even more. And, an investor is not concerned at the minute-to-minute news as these only prompt traders to react. What is of more importance is the underlying fundamental causes driving the market in question.
One other thing to bear in mind is the use of multiple time frames when studying a market. The appearance of a minute chart is different to that of a daily or weekly chart. A trader will typically use and react to short-term indicators. For example, recently there is much talk about the price of gold breaking through its 200 day moving average which is currently set at around $1706 an ounce. However, if we look at a longer-term chart such as the weekly, the 200 MA is only set at $1574. So, individuals using the daily chart may see this as a bearish sign while other individuals using the weekly chart may see this as an unbelievable buying opportunity.
As an investor I look at the longer-term picture and will use this pull-back as another buying opportunity. I am more interested in wealth preservation than the possibility of making large speculative gains. I will buy gold at $1600, $1700, $1800 plus. I absolutely believe that gold is not in a bubble, and I consider gold as the ultimate best alternative currency you can own. It is portable, it carries no counter party risk, it carries no political risk and it is recognized around the world. And, as I have stated many times, I am certainly not going to put my trust in a corrupt political or financial system.