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Panicking Europe, Piigs And The Double Dip Recession Or Gold Will Never Die

Panicking Europe
Piigs And The Double Dip Recession
Or Gold Will Never Die

by Dr. Stephan Ludewig
Gold is a chemical element with the symbol Au (from Latin: aurum, "shining dawn", hence adjective, aureate) and an atomic number of 79. It has been a highly sought-after precious metal for coinage, jewelry, and other arts since the beginning of history. Gold is soft, shiny and the most malleable and ductile pure metal known. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Gold is one of the coinage metals and has served as a symbol of wealth and a store of value throughout history. Gold standards have provided a basis for monetary policies.
A total of 165,000 tonnes of gold have been mined in human history, as of 2009 (World Gold Council). This is equivalent to 5.3 billion troy ounces or, in terms of volume, about 8,500 cubic meters.
Chemically, gold is a transition metal. Compared with other metals, pure gold is chemically least reactive, but it is attacked by aqua regia, forming chloroauric acid, but not by the individual acids, and by alkaline solutions of cyanide. Gold is insoluble in nitric acid, which dissolves silver and base metals. Nitric acid has long been used to confirm the presence of gold in items, and this is the origin of the colloquial term "acid test", referring to a gold standard test for the genuine value of gold.
Gold has been widely used throughout the world as a vehicle for monetary exchange. However, the amount of gold in the world is limited and with the sharp growth of economies in the 20th century, and increasing foreign exchange, the world's gold reserves and their trading market have become a very small part of all markets. At the beginning of World War I the warring nations moved to a fractional gold standard, inflating their currencies to finance the war effort. Gold was replaced after World War II by a system of convertible currencies following the Bretton Woods system. Gold standards and the direct convertibility of currencies to gold have been abandoned by world governments, being substituted by fiat currencies in their stead.
Switzerland was the last country to tie its currency to gold; it backed ~ 42% of its value until Swiss joined the International Monetary Fund in 1999.
Pure gold is too soft for a day-to-day monetary use and is typically hardened by alloying with copper, silver or other base metals. The gold content of alloys is measured in carats (k). Pure gold is designated as 24k. Gold coins intended for circulation from 1526 into the 1930s were typically a standard 22k alloy called crown gold, for hardness.
Many owners of gold store it in form of bullion coins or bars as a hedge against inflation or other economic instability . However, some critical economists do not believe gold serves as a hedge against inflation or currency depreciation.
Bullion coins for investment are typically fine gold at 24k, although the American Gold Eagle, the British gold sovereign, and the South African Krugerrand continue to be minted in 22k metal in historical tradition. The special issue Canadian Gold Maple Leaf coin contains the highest purity gold of any bullion coin, at 99.999%, while the popular issue Canadian Gold Maple Leaf coin has a purity of 99.99%. Several other 99.99% pure gold coins are available. In 2006, the United States Mint began production of the American Buffalo gold bullion coin with a purity of 99.99%. The Australian Gold Kangaroos were first coined in 1986 as the Australian Gold Nugget but changed the reverse design in 1989. Other popular modern coins include the Austrian Vienna Philharmonic bullion coin and the Chinese Gold Panda.
Gold a safe haven or a subject of speculation
Gold is most popular as an investment, investors generally buy gold as a hedge or safe haven against any economic, political, social, or fiat currency crises. The gold market is also subject to speculation especially through the use of futures contracts and derivatives. Furthermore gold is money, although it is treated by some investors as a commodity.
Gold has been used throughout history as money and has been a relative standard for currency equivalents specific to economic regions or countries. Many European countries implemented gold standards in the later part of the 19th century until these were dismantled in the financial crises involving World War I. After World War II, the Bretton Woods system pegged the United States dollar to gold at a rate of US $ 35 per troy ounce. The system existed until the 1971 Nixon Shock, when the US unilaterally suspended the direct convertibility of the United States dollar to gold and made the transition to a fiat currency system. The last currency to be divorced from gold was the Swiss Franc.
Since 1919 the most common benchmark for the price of gold has been the London gold fixing, a daily telephone meeting of representatives from bullion-trading firms of the London bullion market. Furthermore, gold is traded continuously throughout the world based on the intra-day spot price, derived from over-the-counter gold-trading markets around the world.
In March 2008, the gold price exceeded US $ 1,000, achieving a nominal high of US$1,004.38. In real terms, actual value was still well below the US $ 599 peak in 1981 (equivalent to $ 1417 in U.S. 2008 dollar value). After the March 2008 spike, gold prices declined to a low of US $ 712.30 per ounce in November. Pricing soon resumed on upward momentum by temporarily breaking the US$1000 barrier again in late February 2009 but regressed moderately later in the quarter.
After fluctuation returned near the US $ 1,000.00 mark in mid-September 2009, international gold markets peaked at US $ 1,023.30. Pricing later declined moderately again in late September 2009, falling back to US $ 991.70 for the week ending on September 25, 2009.
Later in 2009, the March 2008 intra-day spot price record of US $ 1,033.90 was broken several times in October, as the price of gold entered parabolic stages of successively new highs when a spike reversal to $ 1226 initiated a retrace of the price to the mid-October levels.
Today, like most commodities, the price of gold is driven by supply and demand as well as speculation. Most of the gold ever mined still exists in accessible form, such as bullion and mass-produced jewelry, with little value over its fine weight.At the end of 2006, it was estimated that all the gold ever mined totaled 158,000 tonnes.
Central banks and the International Monetary Fund play an important role in the gold price. The Bank of England and Swiss National Bank, were key sellers of gold. Although central banks do not generally announce gold purchases in advance, some, such as Russia, have expressed interest in growing their gold reserves again as of late 2005.In early 2006, China, announced that it was looking for ways to improve the returns on its official reserves.
The price of gold is also affected by various well-documented mechanisms of artificial price suppression, arising from fractional-reserve banking and naked short selling in gold, and particularly involving the London Bullion Market Association, the United States Federal Reserve System, and the banks HSBC and JPMorgan Chase.Gold market observers have noted for many years that the price of gold tends to fall artificially at the start of New York trading and trader developed seasonal trading strategies for gold.
Important price variables for gold are bank failures, low or negative real interest rates f.i. the stagflation that occurred during the 1970s. Lastly war, invasion, crisis because in times of national crisis, investors fear that their assets may be seized and that the currency may become worthless. They see gold as a solid asset and a safe haven.
Major economic crises (Great Depression, World War II, Oil Crisis) lowered the Dow/Gold ratio, an indicator of how bad a recession is. The ratio fell on February 18, 2009 to below 8. During these times, many investors tried to preserve their assets by investing in precious metals like gold.
On November 30, 2005, R. Munarriz asked the question of which represented a better investment: a share of Google or an ounce of gold. Google closed 2008 at $307.65 while gold closed the year at $ 866. Leading into 2010, Google had doubled off that (100%), whereas gold had risen 40%.

Euro/Gold Trade      
On Aug, 02 2010, Gold closed at $1,181.

Speculative betting against the Euro peaked in mid-May with a short position worth 40% of all EUR/USD contracts on the CME's International Money Market, going back to 21% by the last week of June, see Ludewig S.: Panicking The Euro, 27.05.10. The first day of the third quarter 2010 saw gold prices down and the Euro increases after ending the first-half of 2010 some 13% higher and 14% lower respectively against the Dollar.
The Gold's sell-off was evident, the strength of the Euro saw large-scale liquidation of long Euro-Gold positions, a trade widely advised by bank analysts as the Greek debt crisis intensified in early spring.

Gold/USD Correlation
The gold price normally falls when the dollar strengthens. But by April 2010 gold’s correlation with the US dollar changed.
This changing relationship is understandable in the current uncertain macroeconomic environment. Panic stalks markets everywhere, the biggest perhaps being the specter of sovereign debt defaults in europe.

Double Dip Recession
The double dip recession is a continuous recession that’s punctuated by a period of growth, then followed by a further decline in the economy. In alternative: after a first trough following the recession the economic activity might rise for a period, but not far enough to complete a cycle, then fall again, and finally rise above its original level, only then completing the cycle. Visualy this is a W-shaped movement.
PIIGS (Portugal, Italy, Ireland, Greek, Spain) could be the catalyst that pushes Europe into a double dip recession.
Over the next 30 months maturing debt will cost Eurozone banks
€ 1.3-1.9 trillion.

Another note of concern hitting the markets is that Italy and Spain may be the next battleground. The Italian Govt debt picture is seriously distorted. The debt volume in Italy to be refinanced this year alone is almost ten times that of Greece. The important factor is the volume of short-term debt to be financed, that have to come from the bond market, but the money aint there. Over half of all the 2010 total finance needs for PIGS nations plus Ireland are derived from Italy alone.
The banks in Spain have chosen to ignore the reality of lower property prices, and have carried credit assets at to high values. It is safe to say that the Spanish banks are ready to enter in a freefall. The Greek focus will soon turn to Spain, and also Italy.
The line of thinking, the analysis, the focus is much more directed at national debt exposure, the sovereign debt. The insolvency of big banks has been transferred to insolvency for entire nations and their governments.
The Baltic Dry Index
Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players.  The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it.  The BDI will show how much a company or country is willing to pay to import raw materials immediately.  
Below is the Point and Figure chart of the $ BDI. The price Target is roughly a 65 % correction from the current price of $ 2,500 to $ 850. That's also a sign for an economic downturn, a double dip recession seems guaranteed.
The analysis suggests, that gold is a leading indicator of velocity and inflation. Gold is widely used as a safe haven for investors, especially during volatile economic conditions and times where there is uncertainty about major currencies like we are currently experiencing with the Euro.
Nevertheless, although gold is not an appropriate hedge against inflation risk or exchange-rate risk, it may be a very good investment. After all, the dollar value of gold has nearly tripled since 2005. And gold is a liquid asset that provides diversification in a portfolio of stocks, bonds, and real estate.
But gold is also a high-risk and highly volatile investment. Unlike common stock, bonds, and real estate, the value of gold does not reflect underlying earnings. Gold is a purely speculative investment. Over the next few years, it may fall to $ 700 an ounce or rise to $ 2,130 an ounce.
The prospects will depend on whether double dip recession occurs. Assuming we can avoid a double-dip now, strong emerging market fundamentals will provide a catalyst for a strong rebound in dry bulk trade,Caveat emptor.

Gold will never die.
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By Dr. Stephan Ludewig
02.August 2010

Disclosure: eur usd, gold

Disclosure: eur usd gold