Gold for immediate delivery rose to new record nominal highs of 987.58 British pounds and 1575.18 U.S. dollars in London this morning. New record nominal highs were seen for gold in euros (1,123.50 euros per ounce), pounds and dollars yesterday.
Gold rose soon after FOMC minutes showed that the Federal Reserve is considering further quantitative easing or QE3 and after Moody’s downgraded Ireland’s debt to junk status. The very poor trade deficit numbers in the U.S. yesterday ($50.2 billion in May) and the UK this morning (£8.5 billion in May) is also supporting gold today.
Cross Currency Rates
The Moody’s downgrade of Ireland was expected but the timing was very bad given the increasing turmoil in Eurozone bond markets and deepening risk of contagion due to bond risk in Spain and Italy, the world’s third largest debtor after Japan and the U.S.
While Italian and Spanish bond yields have fallen today, the Irish 10 year yield rose to new euro era record highs at 13.74%.
While UK inflation figures yesterday were slightly better than expected, today’s unemployment figures were worse than expected. Jobless claims rose at their fastest pace since May 2009, showing the UK recovery is faltering and jobs are being lost as the deepest government budget cuts since World War II take hold.
XAU-GBP Exchange Rate
The FOMC’s hinting of further QE3 is of course gold bullish. Although, it is likely to be packaged with some newfangled meaningless acronym. The fragile nature of the U.S. recovery has long meant that the threat of quantitative easing, or money printing and debt monetisation, coming to an end was unlikely.
While the Federal Reserve may be planning significant debt monetization in order to inflate away their massive debts ($14.495 trillion national debt and unfunded liabilities of between $60 trillion and $100 trillion) some of their larger creditors such as China and Russia have communicated to the Federal Reserve that the U.S. should not debase their dollar holdings.
Gold Spot $/oz
Russian Prime Minister Vladimir Putin said yesterday that the United States is acting like a hooligan. Putin lampooned the Federal Reserve’s $600 billion bond-buying spree for flooding the world with cheap dollars.
“They turn on the printing presses and fling them (dollars) over the entire world to resolve their immediate tasks. They say monopolies are bad but only if they are foreign — their own are good. So they use their monopoly on printing money to the full.”
Meanwhile, the increasingly powerful Chinese credit rating agency, Dagong has suggested that they will downgrade the U.S. regardless of whether the US Congress reaches an agreement on raising its statutory debt limit.
Guan Jianzhong, chairman and CEO of Dagong, said that the downgrading is really just “a matter of time and extent”.
Gold’s record highs in major currencies is a sign that the risk of contagion in global financial markets is deepening.
A U.S. sovereign down grade could be the catalyst for contagion.
Contagion in bond markets, financial markets and banking systems would almost certainly lead to contagion in currency markets as fiat currencies are debased en masse in order to prevent a deflationary collapse.
XAU-EUR Exchange Rate
Governments internationally remain in denial about the scale of the crisis and the ramifications.
The ramifications are that some western countries are now facing the risk of an Argentina style economic meltdown.
Exaggerated threats of ATMs not functioning have been used by bankers to justify massive taxpayer bailouts of insolvent banks.
The unfortunate reality is that the massive bank bailouts now mean that cash not coming out of ATM machines may soon be the least of our worries.
Contagion and economic meltdown in western countries would involve runs on banks (insolvent banks backed or “guaranteed” by insolvent states), “bank holidays”, freezing of bank accounts and deposit withdrawal restrictions.
This was seen in Argentina in 2001. Capital controls and exchange controls would also be likely.
In such a scenario, keeping the majority of one’s wealth in savings or deposit accounts in banks or other institutions – whether that be pound, dollar, euro deposits (or deposits in another depreciating fiat currency such as the yen or Swiss franc) is not prudent.
Given the global and systemic nature of the crisis and the huge challenges facing the U.S., the UK, Eurozone countries and Japan – all banks internationally would be vulnerable.
National bankruptcies in western countries would also see insolvent governments unable to pay public sector wages (nurses, police, teachers etc ) or pay for public services. Pensions and social welfare payments could not be paid either.
Social unrest would inevitably ensue.
Gold is essential financial insurance and will protect people from these worst case scenarios – as it has done throughout history.
International equities and international bonds (high credit, low duration) will also offer protection. Provided they are owned in a liquid manner and are held with safe custodians and counterparties. Liquidity and counter party risk will be of paramount importance.
These real risks mean that continuing talk of gold being ‘risky’ and a ‘bubble’ remains uninformed. Some non gold experts have been saying this for more than 3 years – when gold ‘peaked’ at $850/oz in March, 2008.
Uninformed comment by vested interests and others who continue to not know their financial, economic and monetary history is unfortunate. It discourages people from protecting themselves and their families from the coming financial and economic difficulties.
We do not think an economic meltdown is inevitable. Indeed, there remain options which would greatly ameliorate this worse case scenario. However, as ever, it is important to acknowledge this risk and prepare ones finances by becoming properly diversified and owning gold.
Denial and false hope will ensure even greater financial and economic pain.
As ever it remains prudent to hope for the best but be prepared for less benign scenarios.