Gold opened the week at $1204 to close the week on Friday, down slightly at $1191. The action in gold and silver prices this week was dominated by the strength of the dollar. With US interest rates relatively higher than those in the Eurozone, US Dollar denominated assets are attractive and Euro Quantitative Easing (money printing) adds fuel to the fire of the dollar rally.
HSBC the largest bullion bank told investors this week that they expect the $1180 support level to hold. Physical gold Demand in China has flattened with the rally in the Chinese stock market as money in China pours into the Chinese Stock Index (CSI 300). The CSI 300 is up 40% thus far in 2015. Analysts predict that this surge will not continue into the second half of the year and Chinese demand for gold will resume in the coming months. More importantly:
Sovereign Debt and the Banking Crisis in Europe
The Geek debt crisis remains unresolved and without a loan of 7 billion Euro, Greece will certainly default on next week’s payment deadline to the International Monetary Fund. Greece has been unable to negotiate a repayment deal with its creditors. Christine LaGarde, Chair of the IMF warned Friday that a default is a possibility and will almost certainly lead to a Greek exit of the European Union and the Euro. “Economic meltdown” for the Eurozone is the phrase dominating the headlines of the European financial press should Greece default. A Greek exit from the EU will send economic shockwaves throughout the economies of Europe.
The Greek finance minister, Yanis Varoufakis has said, “Our government cannot accept – and will not accept – a cure that, over a five-year period, has proved worse than the disease.” Subsequent to his comments, on Thursday, Greeks withdrew $300 million Euro in one day from their bank accounts. This is 300% of normal withdrawals.
In Spain, Banco Madrid has had its funds frozen while the government decides whether or not to bail out the bank. What does this mean for investors?
Demand for Gold
As reported in CNN Money on Thursday, demand for gold bars and coins in Germany is up 20% in the first quarter this year vs Q1 2014. With the European Central Bank embarking on the Euro QE experiment to purchase $1.3 trillion in government bonds, the Germans, despite having the strongest economy in Europe, perhaps the world, remember the hyperinflation of years past. Add to this uncertainty, the increasing tensions over the significant buildup of Russian military hardware and personnel on the border of Ukraine this week, largely unreported in the US.
The Germans are not alone in this move to the safe haven of gold. The French, Swiss and Austrians have increased their purchases of gold in the same period by double digits as well. In fact, the World Gold Council reports that demand for gold in Europe is the highest it has been since 2011 when gold prices reached $1900.
Sovereign Debt Insanity
We all know that government deficit spending has past the point of no return world-wide and this pace of spending is accelerating. This debt will never be repaid. That is a mathematical certainty. If money printing worked to stimulate the economy, Zimbabwe would be the most prosperous nation on Earth.
I leave you with these questions to ask yourself, excerpted from Zerohedge:
- What happens to our financial system and the price of gold when western central banks are no longer willing or able to ship gold to Asia in exchange for fiat currencies held by Russia and China?
- What would happen if commercial banks announced they will charge you for depositing your currency in their bank?(Oops, that has already happened.)
- What if bail-ins occur, and the banks take your deposited funds to pay off creditors, such as other banks who bought or sold derivative contracts?(If the bail-in is announced late on a Friday and the banks are closed the next week for “restructuring” you will have no opportunity to remove your currency from the bank. In Cyprus the insiders and politically connected escaped with their funds while many other individuals and businesses discovered their accounts had been “bailed-in.”)
- What happens if governments eventually announce that most retirement accounts and pension plans will be required to purchase continually devaluing government issued bonds?
- What happens if trust and confidence in the financial system are lost, banks no longer trust banks, businesses no longer trust they will be paid, and individuals no longer trust their governments or the pieces of paper we call money?
- The Fed has reduced interest rates so investors are chasing yield in all the wrong places, such as junk bonds. What happens when many of those junk bonds, which may have been stuffed into your bond mutual funds and pension plans, are priced at their true value – much less than face value?
What are the consequences? “