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Catching a Falling Financial Knife

We Are Still In The Early Stages Of Major Currency Devaluations

Currencies / Fiat Currency May 17, 2010 - 06:59 AM GMT

By: Miles_Banner

Currencies

Best Financial Markets Analysis ArticleFor the year the gold price is up 10.25% in US dollars, 22.38% in Euros, and 27.85% in pounds (London PM fix). The HUI gold index is up 13.38% and the SPDR gold shares (GLD) is up 9.61%.

In the aftermath of the recent bail out by the IMF and ECB the markets are continuing to undermine the euro.


On Wednesday the Austrian Mint told Reuters that they had sold more gold in the two weeks from 26th April than in the whole first quarter of this year. They went on to say that this demand was coming exclusively from Europe.

Despite this increased demand from Europe the gold price has been held from spiking dramatically as bullion banks have rallied to short it.

The bullion banks go big on shorts

In opposition to Europe’s surge in demand, last week’s Commitment of traders (COT) report showed bullion banks are still building huge short positions, betting against a rising gold price. The producers/merchant net short positions for gold commercials are at an all time high.

Bullion banks have traditionally taken short positions in the gold futures market. This theme has been ongoing for many years. Nonetheless the size of these positions makes us cautious.

The last time they took a similar number of net short positions was back in November 2009, just before the recent correction. With gold prices today at record highs and the problems with the euro and pound driving demand it appears these prices are sustainable.

The problem is the markets seldom move as planned. This past couple of years demonstrate that.

The euro – further to fall?

There is no question that the euro, as a currency, cannot continue to operate the way it has done in the past. It is surprising that there appears to have been a complete lack of foresight and contingency planning that should have accompanied the creation of the Euro.

Argentina, Indonesia, Uruguay and the Dominican Republic are all examples where countries have defaulted after IMF ‘help’.

The new measures are attempting to pull the wool over the eyes of investors. These loans will have to be repaid. There is a day that the ECB and the IMF will demand payment and nothing from what we’re seeing so far from Greece assures us this will happen.

“You cannot make any nation that is unable to service its accumulated debts more creditworthy by extending more credit!” – Jeremy Batstone-Carr, analyst at Charles Stanley.

Hastening the end

Nationalisation of industries, the transference of private sector debt to the public sector and rising debt to GDP have put economies on the road to meltdown. The recent bailouts have sped up the process.

Holders of Greek, Spanish, Portuguese, Italian and Irish debt now have the benefit of being secured by the promise of the ECB. It’s a game changing play. Now banks and bond holders, who had previously worried about the long term security of their businesses, have fresh liquidity with which they can compete for assets. It’s a short term gain… with long term repercussions.

As more US dollars are fed into the markets to patch up the crisis the US look set to deepen their already huge trade deficit. The swap lines between the Federal Reserve and European banks that was stopped in February have now been opened. Pumping more dollars and more Euros into circulation is a last ditch effort to repair a sinking ship.

We’ve been saying for a long time that the gold price will hit new highs, and it carries on to do just that. But, as we’ve also noted before, the market is never as predictable as what it seems. With the bullion banks prepared to raise the level of short positions to record highs we could yet be in store for a short correction. But like the musicians on the Titanic, whatever they do surely cannot change the final outcome.

Regards,

Digger
Gold Price Today

P.S Digger writes a weekly email analysing the gold price and the gold industry. Visit Digger at Gold Price Today (http://goldpricetoday.co.uk).

© 2010 Copyright Gold Price Today - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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Catching a Falling Financial Knife