Stop worrying about gold, start worrying about the euro

According to the author of the article we are in the biggest debt crisis in history and financial leaders want us believing that everything is OK. They continue to make claims that their are signs of recovery even though we continue to see currency devaluation all of the world.

Author: David Levenstein
Posted: Thursday , 19 Apr 2012

Even though we are in the midst of the biggest debt crisis in history central bankers and financial leaders as well as politicians continue to beguile us into thinking that everything is fine and things will eventually return to normal just like it always has before. They may even claim that they see signs of an economic recovery. But, sadly as these central banks around the world, in particular the US Fed, the ECB, BoJ and BoE persist with their policies of monetary expansion in order to revitalise economies we can expect to see their currencies devalue and this Ponzi scheme of ever increasing debt grow larger.

What we can see is that to date, the policies disguised in a series of new terms such as "Quantitative Easing" commonly referred to as QE, Long Term Refinancing Operation (LITRO), US dollar swaps, asset purchasing programmes etc., have not had any impact on reviving the shrinking economies of several Western countries, nor have they done anything to reduce the high levels of unemployment. Yet, their policies have benefited many banks and financial institutions that got us into this mess in the first place.

And, as they come up with new schemes of monetary expansion, now referred to as "accommodative monetary policies," these central banks also attempt to manipulate the currency and gold markets.

Although the mandate of the US Federal Reserve is to maintain price stability, a low level of unemployment and satisfactory economic growth, all we have seen is a false increase in the values of equities, a rise in the price of certain commodities, a stagnant economy and elevated levels of unemployment. Not to mention a never ending expansion of debt. As numerous holders of government debt slowly trim their holdings of US Treasuries, the US Fed has stepped in and now holds around 61% of the government debt issued by the Treasury Department, a trend that cannot last.

The U.S. government is growing increasingly more dependent on borrowing to finance itself, and as the Fed intervenes in the government debt market making demand for Treasury bonds appear higher than it really is, foreign creditors are reducing their holdings of U.S. government debt. So, without foreign buyers and a shrinking base of U.S. corporate and bank buyers, the Treasury has had to resort to the Federal Reserve itself to make the purchases. The Fed purchasing not only makes up the shortfall, but can keep long term interest rates artificially low. And, as this debt continues to explode, and as the US Fed continues to hold more of this toxic debt, the value of the dollar is set to decline. But, then things are not much better in the Eurozone.

The LTRO is another failed programme. On December 21, 2011, the European Central Bank (ECB) started a program called long-term refinancing operation (LTRO). In the first round of LTRO, 523 financial institutions borrowed a total of 489.19 billion euros. But, soon afterwards on February 29, the ECB announced another round. This time, 800 financial institutions received 529.53 billion euros. In total, the ECB has loaned 1 trillion euros since December. But this money is not flowing into the economy and in what I deem as total financial madness the banks are using their LTRO money to purchase more sovereign bonds!

Only last week, according to data, Italian banks borrowed a record 270 billion euros from the ECB in March. And, Spanish banks also borrowed an extra 75 billion euros in March than they did in February, for a total of 227.6 billion euros. As a result Spanish credit default swaps (CDS) jumped to 491 basis points, just two points short of the all-time high reached last November. And Spanish 10-year bond yields jumped 10 basis points to 5.92%.

On many occasions I have mentioned that the debt crisis in the Eurozone is far from being resolved and that Spain represents a major problem. Today, Spain has an economy shrinking at an annualized rate of at around -1.75%, high unemployment (24%), and an insolvent banking sector. The Spanish government needs €190 billion this year alone to fund itself.

Earlier this week, Spain sold 3.18 billion euros in 12-month and 18-month Treasury bills, higher than the planned 3 billion euros but yields rose compared with previous auctions. The yield for the 12-month T-bill was 2.62% compared with 1.42%, while the yield for the 18-month paper was 3.11%, up from 1.715% in a previous auction. On Thursday Spain will sell its 2-year and 10-year bonds and France will have four auctions of bonds with maturities between 18 months and six years.

Unless the ECB intervenes in the markets, the debt crisis will worsen again. However, this means more money printing. And, this will cause the euro to devalue more. But, as this debt spiral deteriorates and the major currencies race one another to the bottom the on-going currency war is only going to heat up. Currency wars are extremely destructive and historically all paper currencies have collapsed. Why should this time around be any different? The only difference will be the magnitude of the devastation for some.

So, while central bankers persist with more money printing and the size of debt in the world increases many smart investors will ignore the political rhetoric and accumulate more gold to protect the purchasing power of their wealth. The next debt crisis in the Eurozone may well be the catalyst that will propel gold prices to a new high. In the meantime, do not become despondent with gold's lacklustre performance. It will soon resume its uptrend.

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