What next after Greece for gold?

The Greece stalemate is more or less in short term as it gets the necessary financial support from European central bank and the IMF. But uncertainties still persist on the medium term to long term over the health of euro. Fiscal problems of any country do not happen overnight and cannot be tackled in an overnight way. It’s just like a cancer, which takes years to be fully blown and even greater number of years and pain to cure the same. Whether it’s Greece, Spain or any other country the medicine for fiscal cures is painful for the masses and always opposed. Sovereign debt default has resulted in gold prices rising to $1249 and Rs.18, 424 (per ten grams) so far in May. The big question is whether higher gold prices will be sustainable for the rest of the year in the absence of lack of major jewellery demand from India, China and other major gold consuming nations.

On 14th May 2010, the U.S. Mint data showed American Eagle one-ounce gold coins totaled 72,500 ounces so far in May, exceeding 60,500 ounces in the entire month ofApril. Investment interest in physical gold was strong, with holdings of the world’s largest gold-backed exchange-traded fund, New York’s SPDR Gold Trust, at a record high 1,209.5 tonnes on 13th May 2010. The fund’s reserves have risen 68.5 tonnes or 6 percent in the last four weeks. The SPDR ETF is the world’s sixth largest holder of gold, ahead of Switzerland, China and Japan.

We all know that the current rise in gold prices is mainly due to the fall in euro against the US dollar and other currencies on safe haven demand and that gold prices fell only after from $1249 to $1180 (as I prepare this report) as Greece issue subsides and euro starts to rise.

Germany prohibited naked short- selling and speculating on European government bonds with credit-default swaps in an effort to calm the region’s financial markets, sparking anxiety among investors about increasing government regulation. The ban lasts until March 31, 2011, also applies to the shares of 10 banks and insurers. In response to the global financial crisis and the euro zone’s debt problems, the German government has been working on a bill to increase protection for investors and reduce wild swings in capital markets. Unilateral action by Germany will only damage the long term prospects of euro.

U.S. regulators are working on their own rules to curb stock trading when markets plunge uncontrollably, as happened on May 6 when the Dow Jones industrial average dropped some 700 points within minutes. The plan was hastily crafted by the Securities and Exchange Commission and major U.S. exchanges and will be implemented as soon as mid-June.

Central banks and politicians are now blaming speculators for all their woes whereas in fact they should not be doing the same. It is developed nations’ central banks, which have over the years kept interest rates at very low levels, kept on printing more money and lent to the consumers so that they spend more, save less and their economies prosper. The excess money needs to be invested somewhere and due to the lack of secure investing avenues the risk appetite of investor rises and continued gains in commodity prices and other alternate investments. After the Greece default gold could be currency among central bankers over the coming years.

Will central banks be able to control gold prices?

There are more and more voices that the global financial markets should be regulated to curb excessive speculation and reduce high intraday volatility. I do not understand the phrase “excessive speculation” as they differ from one central banker to another central banker. Basically politicians along with connivance with central bank heads want to control everything. But the big question is whether they will be able to control gold prices? Just remember that before the Breton- Woods agreement gold was the currency among central bankers and the US dollar rose to prominence after the World War 2 (WWII). We are at the far end or the last phase of Breton- Woods agreement and that world will revert to pre Breton- Woods days. In the short term to medium term central banks can control gold prices through intervention in futures market and by reducing liquidity. But in the long term , market moves on its own and central banks will never to be able to control gold prices. Gold is still undervalued on a long term basis despite negative fundamentals.

Conclusion Before investing in gold or anywhere, just remember that no one is invincible. Even gold prices are not invincible. They are in bull cycle, which has yet to reach its peak. Before that peak there will be sharp corrections, which are a part and parcel of a long term bull rally. As and when new and secure alternate sources of investment are available investment demand will reduce and gold prices will fall to Rs.l6 , 900 and Rs.21, 400 before the next big bull wave to Rs.21, 000 and more.

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