Even though gold prices have not reacted as one would expect in light of the global debt crisis that continues to deteriorate, the demand for physical gold remains extremely robust. To me this is the lull before the storm and I believe that gold is building up for a significant move to the upside over the next three months. Also, it is important to consider the seasonal price trends of gold and if prices follow these seasonal price patterns, it is reasonable to assume that we are going to see higher prices shortly.
Although Greece, Italy and now Spain have all elected new political leaders, the issue of sovereign debt will not and cannot be immediately resolved. With banks, and other financial institutions being so exposed to European sovereign debt, I am convinced that gold prices are on the verge of a significant breakout. Like the US Federal Reserve, in an attempt to save the European banks and private bondholders, the European Central Bank (ECB) will be forced into printing trillions of euros to bail out these insolvent banks and impaired sovereign bonds. On the conservative side the ECB will have to create at least some 3 trillion euros. However, it is unlikely that Germany will allow the ECB to go ahead and print all this money.
The Eurozone teeters on the brink of collapse and with an exposure of some $600 trillion in global derivatives being held by financial institutions another financial crisis is practically inevitable. As government leaders continue to mislead the public with their skewered statistics and meaningless political rhetoric, the truth is that they are only making things worse. More bailouts, more printing, larger deficits burgeoning debt are only exacerbating the current problems.
Even though Greece and Italy now have new governments, auditors from the European Commission, continue keep up the pressure over public finances in Italy and Greece. With regard to Greece, the troika is due to return to Athens very soon to assess whether conditions are suitable for the disbursement of eight billion euros ($11 billion) in loans frozen since August.
But no new meeting of Eurozone finance ministers is likely ahead of their next scheduled gathering on November 29, he added. Greece needs the funds by mid-December to pay its bills.
In the meantime, a US congressional super-committee has failed to reach agreement on at least $1.2 trillion in federal budget savings. Evidently, there is a deadlock over taxes, with Democrats seeking tax increases on high earners while Republicans were pushing for an extension of tax cuts enacted under President George W. Bush. Another sticking point has been the Republicans' call for cuts, over Democrats' opposition, in entitlement programs such as Medicare.
The US national debt has now surpassed $15 trillion and unfunded liabilities are more than $100 trillion. The national debt of Italy is somewhere in the region of $2.6 trillion. And just for good measure, if we include the sovereign debt of the UK approximately $9 trillion, Germany and France approximately $5 trillion a piece, Japan $2.5 trillion etc. the total of the Eurozone, UK, and Japan probably exceeds $25 trillion. The scary thing is, as the cost of borrowing continues to rise with such anaemic economic growth in most of these countries, soon the cost of borrowing will become unsustainable.
Frankly at the moment things in the Eurozone seem really dire. Countries are basically bankrupt and most of Europe’s major banks can’t access funding or are insolvent. And, out of all the major European banks, Unicredit holds the highest amount of toxic debt of which some 50 billion euros worth is coming due next year.
At the moment most western nations are completely insolvent and many major banks barely have enough cash on their books as a percentage of deposits while at the same time have exposure to huge amounts of sovereign debt. It is no surprise therefore that well-informed people are withdrawing money from the banks and either keeping it at home or buying gold.
While most people are completely unaware of what is going on around them, and in some cases, believe that there's no cause for alarm as they think that these issues are not serious and that a monetary crisis is simply a figment of our imagination, we are experiencing a global monetary crisis of an unprecedented scale.
According their latest quarterly report, Gold Demand Trends, World Gold Council stated that third quarter gold demand volume increased by 6% to reach 1,053.9 tons compared with 991.1 tons in the same quarter a year ago. According to the report, “a strong rise in investment demand drove the growth in overall demand, as investors across the globe sought to protect their wealth”.
Investment demand expanded by 33% year-on-year to 468.1 tons, the third-highest quarter on record. This generated record quarterly demand in value terms of $25.6 billion, the Gold Council said.
Investors turned to the precious metal to protect wealth due to concerns about inflation in parts of the world, the U.S. credit-rating downgrade, a worsening Eurozone sovereign-debt crisis and a lack-lustre performance by other assets. Investment demand for gold bars, official coins and ETF’s collectively generated an additional 120 tons of demand during Q3 compared to the same period last year.
Total bar and coin demand surged 29% year-on-year to reach 390.5 tons. Both total bar and official coin demand witnessed growth rates in excess of 30% while demand in smaller medals and imitation coins declined by 18%.
With the exception of India, Japan and the US, all markets recorded an increase in demand for gold bars and coins. Only two (Thailand and Saudi Arabia) posted gains of less than 10%. The remainder all saw very strong double-digit growth in investment demand. In China, investor interest in gold bars and coins expanded 24% to yield quarterly investment of 60.2 tons.
Meanwhile, global demand for gold jewellery of 465.6 tons in the third quarter was 10% below year-earlier levels of 518.9 tons. However, in value terms, demand reached a quarterly record of $25.5 billion.
According to the WGC, central banks made their largest purchases of gold in decades in the third quarter, as a sharp drop in prices in September accelerated the shift to bullion as a means of diversification. The scale of the buying, at 148.4 tons on a net basis, was far bigger than previously disclosed, surprising some traders.
The WGC declined to identify of the central banks behind the majority of the buying citing confidentiality restrictions.
The purchase of 148.4 tons in July-September is the largest since GFMS, the consultancy which produces the data underlying the WGC reports, began compiling quarterly numbers in 2002. Before then, the last time central banks were net buyers of gold was in 1988 when they bought 180 tons.
Marcus Grubb, head of investment at the WGC, said of the buyers: We believe it's a number of purchasers from different countries.
The majority of the buying took place in September after prices fell sharply from record levels at $1,900 to a low of $1,534.49, he said. It coincided with growing international tensions over the US dollar after a dispute in Washington about raising the US debt ceiling.
However, Mr Grubb said the buyers were probably pursuing longer-term targets: Central bank buying tends to follow a different heartbeat than pure investment purchases of gold. It's often based on targets set earlier in the year on gold as a proportion of foreign exchange reserves.
He predicted that central bank buying for the full year could be 450 tons, implying a further 90 tons in the fourth quarter.
Even though the price of gold has fallen around $50 an ounce in the last two days, I am convinced that it is setting up for a major move to the upside. Most gold bugs know the yellow metal has a seasonal tendency to perform better in the last few months of the year than in the months of June, July and August. So, if we consider the financial crisis in the Eurozone as well as in the US, and if gold repeats its seasonal cycle this year, the demand for physical gold can only increase. This will put upward pressure on prices and I maintain that we will see a re-test of its previous all-time highs within the next 3 months.