Own Gold to Protect your Wealth against Financial and Geopolitical Risk

Gold fell around 5% last week despite no major economic data, news developments or significant news regarding physical supply and demand. Once again the decline in the price of the yellow metal can be attributed to massive selling of futures contracts leading to further technical selling as stop loss orders were triggered.

While prices dropped there was no marked decrease in global physical bullion demand or significant physical selling of any note. However, the market was reacting to two events that were unfolding. The first event was to do with the latest developments regarding Syria and the other event had to do with the possibility of the US Fed announcing plans to taper its bond purchases.

Gold prices fell as the risk of a US military strike against Syria receded. And, once again traders using futures contracts succeeded in knocking the price lower. Over the weekend, both the US and Russia formulated a proposal that stipulates that Syria must provide full details of its stockpile within a week. Also, the chemical arsenal must then be eliminated by mid-2014.

If Syria fails to comply, the deal could be enforced by a UN resolution with the use of force as a last resort.

But US officials say the president reserves the right to act without the agreement of the UN.

China, France, the UK, the UN and Nato have all expressed satisfaction at the agreement.

In Beijing, Foreign Minister Wang Yi said on Sunday that China the deal “will enable tensions in Syria to be eased”.

There has so far been no reaction from Damascus.

The Free Syria Army, the coalition of armed rebels that has been hoping for Western help to fight the Assad regime, has rejected the agreement. The military leader of the anti-Assad Free Syrian Army has rejected the deal and promised to continue fighting.

“There is nothing in this agreement that concerns us,” said Gen Salim Idriss, describing it as a Russian initiative designed to gain time for the Syrian government.

Less than a week ago the FSA believed that the Americans were about to launch a military attack, which it hoped would tip the balance of the war its way.

Whether or not chemical weapons are destroyed is irrelevant. The FSA want the Americans to destroy the regime’s military power, and the US agreement with Russia means the chances of that happening are receding. So, regardless of the outcome of the current issue, I expect to see the conflict in Syria to continue.

Russia and the US have agreed on an assessment that the Syrian government possesses 1,000 tons of chemical agents and precursors, according to a US official.

The US believes the materials are located in 45 sites, all in government hands, half of which have useable quantities of chemical agents.

On Monday, the UN has confirmed “unequivocally and objectively” that chemical weapons have been used in Syria.

In a report, the UN stated that Sarin gas was used in a rocket attack in the Syrian capital, Damascus, last month, although it has not attributed blame.

“This is a war crime,” Secretary-General Ban Ki-moon said.

US allegations that the government was responsible led to threats of military action and then a US-Russia deal for Syria to make safe its chemical arms.

In a speech to the UN, Mr Ban said. “The mission has concluded that chemical weapons were used on a relatively large scale in the Ghouta area of Damascus [on 21 August]… The attack resulted in numerous casualties, particularly among civilians.”

The UN investigators examined blood, hair, urine and rocket samples.

Syrian President Bashar al-Assad has denied responsibility and blamed rebels.

The UN Security Council is expected to draft a resolution in the coming days.

World powers will now try to hammer out a UN Security Council resolution.

However, no matter the outcome of the resolution, the Syrian conflict will continue and is set to even deteriorate.

This week the financial markets will be focused on the upcoming FOMC meeting. Despite recent disappointing economic data from the US, it is generally expected that the Federal Reserve will begin to taper its asset purchases. While no figures are known at the moment, it seems that the market has already factored in a small cut of around $10 billion.

The Federal Reserve’s upcoming decision has to be this year’s most-highly-anticipated market event. For months traders have been trying to determine the action of the Fed. So, the Federal Open Market Committee’s decision due out this Wednesday is likely to have far reaching ramifications.

No matter what the Fed decides, any tapering or even lack thereof, its size, and what the FOMC implies for future tapering will almost certainly spark sharp price reactions in the bond markets, currency markets, stock markets, and precious metals.

It is important to remember that between the FOMC’s May 1st meeting and last week, mere QE3-tapering fears have catapulted the benchmark 10-year US Treasury yield from 1.66% to 2.98%!

Higher bond yields wreak havoc on the economy, driving up all borrowing costs. Since the mere threat of the Fed slowing its bond purchases sparked a massive bond selloff, can it risk the actual event driving yields even higher? Unemployment will surge again if house buying slows.

Higher interest rates are a huge threat to the US government too.  If yields on Treasuries rise, the cost of funding the national debt which has already exploded higher, will become unsustainable and will eventually sink the government.

Yesterday, in an unexpected move, former US Treasury Secretary Lawrence Summers withdrew from the Fed chairman candidacy.  The former Treasury Secretary Summers’ withdrawal from the Fed chairman candidacy impacted on the US dollar which fell as much as 0.5% to the lowest since Aug. 12. Summers was widely viewed as more hawkish than other leading candidates to run the Fed, meaning he was seen as more likely to push for a speedier end to the central bank’s easy-money policies.

The other favourite candidate, Janet Yellen, is known to be very dovish, favouring ultra-loose monetary policies, even more so than Bernanke. Therefore, her appointment would be bullish for gold as ultra-loose monetary policies and currency debasement will continue.

Yellen favours a continuation of zero interest rate policies (ZIRP), which is as important if not more important than ‘tapering’. Yellen said in December 2012, that early 2016 may be a more realistic time to start increasing interest rates.

The way I see it is that Yellen will not be good for the US dollar. But then, it does not matter who takes over the Fed. It has become a flawed institution. And, the people in power should be held accountable for manipulating just about every market and stop printing money. But as this is unlikely to happen, and as we know current Fed Chairman Ben Bernanke’s replacement won’t do that we can expect more of the same. Ultimately, this will lead to the total loss of confidence in the US dollar. And, when this happens, the price of gold and silver will sky-rocket.

For the past four years, the US Fed Fund Rate has been essentially zero, and we have a massive money-printing, monetary inflation that creates a huge pool of liquidity. And, as I have mentioned many times previously, I have my doubts about the US employment figures and certainly don’t believe there is a global recovery at hand. And, in order to protect yourself, it is essential to diversify and minimise your risks from economic, political, geopolitical and other factors.

Your portfolio should include physical gold that is held out of the banking system. And, this physical gold does not include gold exchange traded funds, or limited edition medallions. Gold is not like other commodities, it’s the only honest currency and an alternative currency to all paper currencies.

Technical analysis

gold_price_september_16_2013

Gold prices are back below the 50 day MA, but I expect this to be short-lived and I believe prices will soon trade higher.

 

About the authorDavid Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.  For more information go to  www.lakeshoretrading.co.za

 

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