|
June 4, 2012
By Dr. Martin Murenbeeld, Chief Economist, DundeeWealth Inc.
 View Full Screen Image or Print PDF of Chart
From our perspective, gold should rise on the back of the Eurozone crisis, regardle ss of what the Euro does against the U.S. Dollar. To quote from last week's report, "there is no way to keep the Eurozone whole without a tremendous amount of new liquidity, and there is no way to manage a breakup (even one as relatively simple as Greece leaving – a "Grexit") without a significant amount of new liquidity". Maybe that fact is finally beginning to dawn on the gold market!
Assuming that Greece does not leave the Eurozone, but that it will likely take close to a generation for Greece and other southern European countries to become "competitive", liquidity will be needed to "bridge" these countries for close to a generation. Where will this liquidity come from? The answer is transfer payments from other Eurozone members, EU-bonds underwritten by other Eurozone members, and ECB/ESM/IMF purchases of sovereign and bank debt.
There is no way of knowing just how much liquidity will be required, but Spain and Italy together need to raise about 1800 billion Euro over the next four years. If markets prove to be unreceptive Germany and others will not provide such largesse without, at a minimum, an air-tight promise of fiscal austerity.
View Full Screen Image or Print PDF of Chart
How much Greece already owes the "system" is provided herewith, and is a first quick estimate of the amount of money Greece will not pay back after it leaves the Eurozone. If there is any doubt about this, Mr. Tsipras of Syriza (the Radical Left) made it clear: "Our first choice is to convince our European partners that, in their own interest, financing must not be stopped ... but if they proceed with unilateral action on their side, in other words they cut off our funding, then we will be forced to stop paying our creditors, to go to a suspension in payments to our creditors", (WSJ, May 18, 2012).
View Full Screen Image or Print PDF of Chart
And that is only the beginning of the liquidity problems after a "Grexit"! "Can the Eurozone contain the contagion?" asks the (FT, May 13, 2012); to which it answers: "If the political will to hold the single currency together exists, the Eurozone has a big weapon in its arsenal to contain the contagion: unlimited action by the ECB. It could restart bond-buying at very high levels to limit rises in sovereign bond yields and offer unlimited liquidity to peripheral-nation banks to offset a run on deposits" (bolding added).
The economic and financial dangers are many after a "Grexit", and the first is a bank run in Portugal, Spain and Italy. There is only one way to stop a bank run: with "unlimited quantities" of central bank liquidity. (The reader may have seen the reports of massive bank withdrawals in Greece. When redeposited in German banks, by the way, it adds directly to the Target2 debt of the Greek central bank). Maybe the gold market is finally beginning to focus on this!
View Full Screen Image or Print PDF of Chart
Gold Watch:
(1) The IMF wants the ECB to stop dithering. "The ECB has room for further monetary easing...further unconventional policy measures may also be needed" (WSJ, May 17, 2012). Spanish bank withdrawals are rising too!
(2) A new study by Fitch Ratings found that, "The world's 29 largest global banks will need to raise an additional $566 billion in new capital or shed about $5.5 trillion in assets by 2018 to meet the new tougher Basel III bank capital standards", (FT, May 17, 2012). Is this a case of "it never rains but it pours?" "The 29 banks face significant hurdles if they are to meet the higher standards by 2018." No kidding!
(3) Japanese households have been selling gold in recent quarters (though consumer demand was positive, just, in the first quarter of 2012 according to Gold Demand Trends). But in a sign of "dwindling faith in paper currencies" the Okayama Metal and Machinery pension fund announced it would henceforth aim to keep 1.5% of its total assets in ETF's (FT, May 16, 2012). It's the first Japanese fund to publicly say they are making a commitment to gold. We won't hold our breath over the $7.5 million investment in gold, but we can't argue with the fund's rationale: "from a very long-term point of view, gold may be one of the safe currencies".
(4) John Hathaway of the Tocqueville Gold Fund is among the most respected gold fund managers around. His comment on dividends is therefore noteworthy, and echoes comments by others: "[Companies] should be paying out more and more. At the current gold price, the payout ratio among large producers is less than 20.0%. It's way too low!" (Mineweb, May 14, 2012). Certainly the demographics of investors argues for more dividends, and it wouldn't hurt gold equity prices either – which going by our charts herewith are desperately depressed.
(5) Risk Ranges: Narrow $1,525-1,675, Wide $1,475-$1,750. The risk ranges have not been changed this week. The charts continue to suggest that there is downside potential – into the low $1,500's, as we have already seen. The 50-day MA is below the 200-day MA; such a "death-cross" last occurred in 2008! But this week's bounce may help repair investors' confidence somewhat. From our perspective the macro-environment is very good for gold. We'll see what the G-8 says after the weekend and what, if anything, comes out of the EU leaders' get-together on Wednesday the 23rd. But we do not rule out a Scenario C-like upturn in the second half of this year.
Source: This article was originally published in DundeeWealth's Gold Monitor, May 18, 2012, www.dundeewealtheconomics.com.
COPYRIGHT 2012 DUNDEEWEALTH
REPRINTED WITH PERMISSION OF DUNDEEWEALTH
Disclosure/Copyright/Usage Policy
|
