As The Currency War Intensifies, Gold Prices fall…but not for Long

Gold prices broke below the $1300 an ounce level last week hitting a three-week low, weighed down by a stronger U.S. dollar and some upbeat U.S. economic data. And, prices have remained under some downward pressure this week.

It seems that prices have fallen due to trader activity on the futures markets of Comex, as sentiment towards gold has once again turned bearish on renewed speculation the Federal Reserve could soon start scaling back its monetary stimulus programme. An end to the Fed’s quantitative easing programme is expected to hurt assets such as gold and silver, which has been boosted by central bank liquidity and low interest rates.

The US dollar gained against most of its peers sending the price of gold lower as positive third quarter GDP growth and a much-better-than expected jobs report boosted the greenback further pressuring gold. The news has renewed speculations that the Fed may taper the $85 billion per month asset purchase program in December, rather than in March. However, even though the latest non-farm payrolls report showed that the U.S. economy added 204,000 jobs in October, the Labour Department failed to mention that labour force participation rate, plunged from 63.2% to 62.8% – the lowest since 1978!

But more importantly, the number of people not in the labour force exploded by nearly 1 million, or 932,000 to be exact, in just the month of October, to a record 91.5 million Americans! This was the third highest monthly increase in people falling out of the labour force in US history.

With a staggering 91 million people no longer in the labour force, it is practically pointless focusing on the short-term employment figures because they are totally meaningless.

Furthermore, many new jobs added were retail and not the kind of jobs that are indicative of a booming economy. Meanwhile, the unemployment rate ticked up to 7.3% from 7.2%.

Gold prices experienced a brief rally in the immediate wake of a somewhat surprising move by the European Central Bank (ECB) to cut its key interest rate on Thursday. However, after the announcement of the ECB rate cut, prices fell on the release of the latest U.S. gross domestic product data which showed a much stronger-than-expected reading, at up 2.8% on an annual basis in the third quarter versus expectations of a 2% to 2.5% rise. The news boosted the US dollar and put downside price pressure on gold.

Last Tuesday, the European Commission said growth across the 17-member single currency area would amount to 1.1% next year, down from the 1.2% it forecast in May. The commission also predicted that the Eurozone economy will shrink by 0.4% this year, which is same as their previous estimate.

The Commission acknowledged that unemployment in the Eurozone would remain at elevated levels at around 12% meaning that some 20-million people would remain unemployed.

As well as unemployment, the modest recovery poses other problems, especially for member state public finances as tax revenues remain under pressure.

The French economy is struggling and President Francois Hollande faces growing pressure from Brussels to meet the EU’s 3.0% of-GDP ceiling as agreed by 2015. If it misses its targets, Paris could face fines or intervention by Brussels under new rules on economic policy coordination.

Last week Standard & Poor’s downgraded France to AA and warned that France is on borrowed time with a state sector over 56% of GDP!

According to S&P, Hollande made matters worse by relying on taxes, not spending cuts.

Meanwhile, Spanish public finances are even more perilously wide of the mark. As Madrid strives to emerge from a burst property-and-banking bubble, nine quarters in a row of recession and soaring joblessness, Spain was given until 2016 to comply after a bailout for its banks.

However, despite waves of austerity already, Spain’s public deficit is expected to reach 5.9%t next year and worse still, rise again to 6.6% in 2015.

In an unexpectedly quick response to the dire economic warning signals, the European Central Bank cut its benchmark interest rate to a record low on Thursday, moving to head off what some economists fear could be a long period of stagnation like the one that has afflicted Japan.

The much-anticipated ECB monthly monetary policy meeting saw the central bank cut its key lending rate by 0.25%, to 0.25%. The cut in the E.C.B.’s main rate to 0.25% from 0.5% took many analysts by surprise. The central bank was reacting to a sudden drop in euro zone inflation, which fell to an annual rate of 0.7% in October, well below the bank’s official target of about 2%. The decline raised concerns of a deflationary environment leading to fall in prices that could destroy the profits of companies and the jobs they provide.

In a news conference ECB chief, Mario Draghi insisted that the E.C.B. was not expecting such a catastrophic situation. “If we mean by deflation a self-fulfilling fall in prices across a very large category of goods, and across a very significant number of countries, we don’t see that.” he said. “I don’t think it is similar to Japan.”

The BoE announcement was a non-event with the central bank keeping rates unchanged at 0.50% and held the asset purchase target at GBP 375 billion. While the UK government talks about a slight improvement in the economy, any intelligent person can see it’s not true.  Like the US, the economy in England is totally supported by the ultra-loose monetary policies of the BoE.

Recently, the BIS released its quarterly report, in which they stated that the situation in the banking and financial system is worse today than it was pre-Lehman collapse.  Despite all the media hype of a recovery, nothing has improved since 2008, and the European banking system still remains under enormous pressure and currency debasement continues.

It is now more than evident that the monetary policies of the central banks have failed miserably when it comes to boosting economic growth. On the one hand, we have the ECB grappling with the prospect of deflation and economic growth and on the other hand, we have the US Federal reserve that has become the largest buyer of US Treasuries owning some $2 trillion in bonds, and around $1.2 trillion in mortgage-backed securities. And the only way the Fed can repay them is by printing more money, not less money.  But, as the central banks continue with their expansionary policies the global currency war is intensifying.

Central bankers around the world are slashing interest rates and printing unprecedented amounts of money.

When, the ECB cut its benchmark rate by a quarter of a point to a record low 0.25%, the Czech National Bank announced it would sell koruna “for as long as needed” to boost growth, according to Governor Miroslav Singer. This is the first time the Czechs have intervened in the currency market in 11 years. The koruna fell 4.4% against the euro on November 7. New Zealand said it may delay rate increases to temper its dollar, and Australia warned the Aussie is “uncomfortably high.”

And, on November 4, Peru’s central bank cut the overnight interest rate to 4% from 4.25% – its first cut in four years

As central banks around the world continue with their quantitative easing and low interest rate policies, if they don’t achieve their desired level of inflation, they cut rates further and print more money. It’s a vicious cycle.

This leads me to believe that there will not be any tapering in the short-term and the major central banks, the US Fed, the ECB, the BoJ and the BoE are going to continue with their expansionary monetary policies and thus debase the value of these fiat currencies.

Gold prices will continue to be volatile and the sideways action may continue for several more weeks. However, I believe we will see higher prices as we move towards the end of the year.

Technical picture

gold_price_11_november_2013

Since gold price failed to gain traction on the upside, a test of the support at $1275 (S) might be possible, before we see a resumption of the up-trend.

 

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

Receive these articles per e-mail

Subscribe for the free weekly newsletter and receive 3 papers about physical precious metals investing