Peripheral Europe is troubled with Italy and Spain deep in the hole.
The only truth in this world is that people sell gold in crisis. What are they going to do to wind down their position on gold without disrupting the market?
Largest gold holdings by country:
United States: 8,133 tonnes
Germany: 3,391 tonnes
Italy: 2,452 tonnes
France: 2,435 tonnes
China: 1,054 tonnes
Switzerland: 1,040 tonnes
Obscure Russia: 978 tonnes
It's worth noting that many Wall Street participants have been gobbling up gold like mad since more than a year ago. For example, investor John Paulson holds $10 billion worth of gold (personal wealth but also trading on behalf of whale-investors).
Watching the graph of gold, it seems there are many investors with long positions on gold built up during the last years, that would be willing to sell now. That's why it's announced that representative Ron Paul will appear today on Bloomberg TV saying that we need to return to the gold standard as monetary system, playing the big banks' game, because they are scared of the multiple Golden Whales out there.
Vicious cycle: until now, the battered european governments have been financed by the comercial banks by purchasing their debt, thanks to cash from the Central Banks' liquidity schemes (both the ECB and the BOE). But now the IMF has a tough stance against this practice and will surveillance that the comercial banks are truly using the Central Banks' funds to lend to individuals and corporations and not battered governments. So, let's hope the IMF has cut off this vicious cycle drastically.
Also the Federal Reserve has in place a Quantitative Easying (QE) policy.
QE means to monetize debt. The objective is to increase the value of the financial assets in the books of the financial institutions (increase the mark to market valuation or "paper profits") due to rate declines and spread tightening, but also, to inject cash to the private sector purchasing debt instruments in their hands (more liquidity to the system like the european central banks are doing).
MISCONCEPTIONS ABOUT GOLD
1-QE doesn't mean higher gold prices: More liquidity to the system doesn't mean that the banks will necessarily decide to use that liquidity to buy gold among all the universe of assets and also, I've just mentioned that now the banks will be forced to lend more to individuals and corporations.
2-Gold is not a hedge against inflation: primarily because products manufactured with gold don't appear in the index of inflation. If you want to hedge your portfolio against inflation, you need to buy hard assets.
3-Gold is not a hard asset: Hard assets are related to infrastructures of oil and electricity, with a production that has impact on the overall economy's prices and, subsequently, is reflected in the inflation data.
4-Gold is not a governments' reserve different than the oil reserves: Governments hold reserves of gold and also strategic reserves of oil and gasoline. Therefore, gold shouldn't trade at a premium for being held as reserve by some governments.
5-There is no shortage of gold: Every 20 or 30 years, new technology is used capable of finding more gold and oil.
In simple words, gold is just a hedge against fear on the stability of the financial markets.
But without prospects in the coming years of a ECB bankruptcy due to a bond-buying program of the battered peripheral europe's debt or a war against a remote small region full of fake-jihadists (Putin would love it) that posted a video claiming responsibilty about two different terrorist attacks on U.S. soil, there is no fear factor.
(By the way, I'm still waiting to see Bloomberg TV's interview yesterday to representative McCain with a tough stance against Chechenia that wasn't broadcasted in full).
Now say with me:
People sell gold in crisis.
People sell gold in crisis.