Weekly Gold Report For September 7, 2012: Gold's Transformation

by: Patrick MontesDeOca

By Patrick MontesDeOca

According to the World Gold Council, gold is being discussed and considered as part of the solution to the eurozone crisis. Natalie Dempster, Director of Government Affairs reviews the possibility that the ECB could consider creating a European Stability Fund that could be collateralized with gold.

As we are currently witnessing the biggest transition in the history of the eurozone, central bankers and leaders are looking at all the possibilities available in order to maintain economic stability, fiscal responsibility and political support for the region.

The eurozone's gold reserves currently stand at almost 10,000 tonnes, and its central banks have benefited greatly from their gold holdings over the past decade, in part thanks to gold's unique wealth preservation characteristics.

The European Commission itself suggested in a recent Green Paper on Stability Bonds that were Europe to move towards fiscal integration and issue a common euro bond, the credit quality of that bond could be enhanced by collateralizing it with gold.

This provides benefits at many levels. It could provide an alternative, economical solution to more effectively provide financing solutions to eurozone members under economic stress. It would enhance the face value; credibility and backing of the bond issuer. Lastly, by increasing the collateral base with gold, it would reduce the risk of the bond holder and therefore a much lower yield or interest rate would be required.

Within an appropriate structure, a gold-backed bond could be a credible and attractive proposal which could reduce sovereign borrowing costs to sustainable levels. This only serves to reaffirm gold's credentials as a unique and highly compelling reserve asset.

The collateralizing of gold is a benefit which the private sector has been quick to harness to great effect since the first waves of the financial crisis. Stemming from the inclusion of gold as "high quality liquid collateral" under the European Market Infrastructure Regulation, LCH.Clearnet and ICE Clear Europe have both started to accept gold as collateral for the clearing of derivatives contracts.

The Bank of International Settlements (BIS) has proposed by January 2013, to reclassify gold bullion as the safest and the highest quality of assets for central banks around the world as a Tier 1 asset.

A Tier 1 asset means that the yellow metal will be at the top of the pyramid right next to fiat currency and will benefit by this transformation to a negotiable collateral instrument just like any other security or fiat currency.

The central bank in the U.S., the Federal Reserve, recently released a memo to change the status of gold bullion in this country. (Source: Federal Depository Insurance Corporation, June 18, 2012.)

Currently, world central banks use gold as a risk asset that can be collateralized up to 50% of its market value to compensate for the risk gold bullion carries. As a Tier 1 asset, gold could enjoy the company and same status as other financial instruments. Banks now can use gold bullion as a diversification from other assets on their balance sheets.

The proposal and consideration to use gold as a solution to the world financial crisis and reclassification of gold bullion as a Tier 1 asset could have major long-term bullish implications for the price of gold. The current price of gold around the $1,740 per ounce could potentially double by 2016.

(click to enlarge)

Let's take a close look at the gold charts and see what the technical picture is over the near term.

The December (Comex) gold contract closed at $1,737.60. The 52 week Range is $1,535 - $1,934.6. The market closing above the daily 9, 18 and 36 day MA's on a weekly basis, puts into perspective the near-term $1,900 target levels and the September 2011 highs of $1,934.6 per ounce.

The market's closing above the VC Weekly Price Momentum Indicator of $1,724 is bullish. Look to take some profits if long as we reach the $1,760 to $1,781 levels early this week. If stops are taken out here, we could see a sharp rally up to the $1,785 to $1,800 weekly resistance levels.

Buy corrections at the $1,702 and $1,666 levels to cover shorts and go long on a weekly reversal stop. If long, use the $1,666 level as a SCO/GTC (Stop Close Only and Good Till Cancelled order).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Trading in the financial markets involves significant risk of loss and is not suitable for everyone. Past performance is not necessarily indicative of future results.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Problem with this article? Please tell us. Disagree with this article? .