As governments continue to perpetuate the chaos that is already occurring in the currency markets, the advice is make sure you own some gold - the oldest form of sound money.
Author: David Levenstein
Posted: Tuesday , 01 Nov 2011
JOHANNESBURG -
The price of gold pushed through and held above the key resistance level of $1700 an ounce last week, as the US dollar dropped sharply due to the euphoria from Europe about the agreement made at the Euro Summit in Brussels. No one was more excited about the outcome than French president, Nicolas Sarkozy, who seems determined to save the world.
With regard to the recent summit in Brussels the key issues agreed on were, that the euro currency remains at the core of the European project of peace, stability and prosperity. The leaders also outlined certain steps that have to be taken in order to solidify the economic union. And, commensurate with the monetary union, they agreed on certain key issues.
They all agreed that the Greece's debt to GDP ratio with should decline to 120% by 2020. They also agreed that the European Financial Stability Facility (EFSF) resources can be leveraged. The leverage could be up to 4 or 5, which is expected to yield around 1 trillion euro (around 1.4 trillion dollar).
It was also agreed that it was necessary to raise confidence in the banking sector by (i) facilitating access to term-funding through a coordinated approach at EU level and (ii) the increase in the capital position of banks to 9% of Core Tier 1 by the end of June 2012.
The agreement also included a deal between Eurozone leaders and banks to force private investors to take a 50% loss or "haircut", slicing 100 billion euros off the 350-billion-euro debt pile hampering Greece.
There was also an unequivocal commitment to ensure fiscal discipline and accelerate structural reforms for growth and employment.
As far as I am concerned the deal clinched in Brussels offers nothing but a short-term reprieve and is unlikely to be enough to stop the crisis from spreading in the long run. Now, governments can't even afford to service their own debts without having to resort to trickery such as suspending "mark-to-market" accounting rules and printing more money to buy their own bonds (effectively a Ponzi scheme). Frankly, all they are doing is perpetuating the chaos that is already occurring in the currency markets.
According to Jim Rogers, a world-renown commodity advisor, who has been consistently correct about precious metals since the beginning of the bull market in 2001. "Politicians have delayed addressing the problem yet again." "It will come back in a few weeks or a few months and the world will still have the same problem, but this time only worse because the European Central Bank and other countries will be in deeper in debt."
Rogers reiterated that widespread haircuts across Europe are necessary to truly resolve the crisis. "Greece is bankrupt, but others are too, and these haircuts will have to come back and be wider," he says, adding that this morning's global stock market rally had the potential to last for a while.
"There has been a major overhang, so we will see the easing of some pressure, but the problem will come back because the Western world still has not dealt with its debt," says Rogers.
"Most European countries are increasing their debt rather than decreasing their debt. Until that changes, the problems are going to continue, just as they will in the U.S.," he added.
Even though global markets surged after the summit deal was announced, contagion in Spain and Italy remain a real risk. Italy's debt alone is €1.8 trillion which in itself is larger than the €1 trillion bailout fund. And, their 10 year bond has risen to close to 6% in recent days.
The deal "has the merit of validating a European framework, not to resolve the debt crisis, but at least reassures and (tries) to convince markets of Europe's collective will," said Barclays Bourse analyst Frankin Pichard.
The crisis that started in Greece two years ago has successively hit Ireland and Portugal and threatened to spill over to the euro area's third and fourth economies, Italy and Spain.
"The next meeting on November 3-4 (at the G20 summit in Cannes) should provide more details on how the new formula EFSF will function," said Pichard.
"We're also waiting for further indications on states' credibility, notably Italy and France, concerning their ability to reduce their budget deficits. Chaos has been distanced but the path is still long before crying victory."
The head of the European bailout fund Klaus Regling said that he expects the Eurozone's economic problems will last two to three years, and long-term issues will remain. Regling's remarks suggest Europe still faces a long road to recovery from its sovereign-debt crisis... finish reading article at Mineweb
