Last Updated on Tuesday, 30 November 1999 05:00 Friday, 05 August 2011 11:03
Gold is on a constant rise for last 10 years, gaining 16. 5 percent only in 2011. It can be argued that the shifting of wealth from the West to the East could be one major factor, triggering a surge in gold prices. But any delay in reaching understanding on America s debt issue in enhancing the borrowing limit and European debt crisis is considered a bigger issue in the pipeline, which many still believe could have a contagion effect as it is likely to spread to Spain and Italy, as the bond yield of the two European countries does not bode well and is the key driver behind the current rally.
Gold s biggest boost could have come from the central bank buying, as latest IMF monthly report disclosed that Russia, Thailand and Kazakhstan purchased gold in June. IMF data also suggest that Thailand bought gold for the 3rd time in last 12 months. And interestingly South Korea purchased gold for the first time in over ten years.
Gold lovers will be keenly watching rating agencies, as US growth is in question. Therefore, FED policy measures will be keenly watched. If the US central bank goes for a third time quantitative easing, it could blow the whistle.
Central bank s gold buying interest around current levels is a very dangerous sign and could be a huge driving factor behind gold s next big move, as investors will have no intervention fear. It is rather a signal to investors that central banks are themselves looking for investment opportunities and are diverting their portfolio from currency to solid asset. Presently, the average holding of gold by the global central banks is 11 percent. This is enough reason for the market to rush for gold, unless there is a clear-cut policy announcement by the IMF or the concerning body.
A technical chart suggests that next barrier is at USD 1840 or probably USD 1940, with support at USD 1520 and major support at USD 1440. However, the rally could continue and buyers will emerge on dips. USD 2200 is a good future possibility if gold goes unchecked.
SNB cuts rate to defend SFR In a surprise move, Swiss National Bank (SNB) slashed its rate by 50 basis points and threatened to supply SFR to halt its currency rise. Soon after the intervention SFF, that gained 10 percent against euro in two months, lost three percent of its value against the USD.
According to OECD calculation, Swiss franc is the most over-valued currency in the world. It is over 43 percent overvalued against the US dollar. With such formidable strength, it becomes extremely difficult for the Swiss exporters to remain competitive.
But in an environment where majority of the developed countries are struggling to survive against debt trap, what more options do the investors have to put their money? Size-wise Canada, Australia, New Zealand, Indonesia, Singapore, HK or Nordic countries have a small product to offer. The US is in a debt trap. Europe is taking a breather after arrangements made for Greece and Ireland with longer maturities, which are not a permanent solution. Spain is next in queue to fall in the debt web trap. European recovery is not going to happen anytime soon, whereas Euro Zone debt crisis remains an unresolved issue.
Investors are so desperate that despite Japan - though already bitten by the recession is again suffering due to March s Tsunami - are still buying Japanese yen around all time high levels and Bank of Japan (BoJ) had to intervene to defend its currency. The problem is quantitative money. With zero - 0. 25 percent Fed rate and Fed is printing money at will. So where should the money flow? In a $60 trillion global economy with 3 percent annual average growth, $180 billion cash money is generated. Global consumer purchase represents more than 50 percent, which means over $30 trillion. So, some part of money will certainly look for better investment portfolios.
Look at the commodity prices. Did you ever think that in a short span of 41/2 years, gold from $450 would hit $1660? There is no food shortage in real terms, but food prices are surging due to speculative forward buying. The demand for US treasuries is incredible.
While Swiss Franc has traditionally been considered a safe haven currency because Swiss National Bank has never delayed fighting inflation, which is currently below one percent. Its debt-to-GDP is 39 percent. In the last two years, SFR gained 20 percent and so far in first seven months of 2011 it has gained 16 percent.
This is an extremely tough situation for the Swiss business community, especially exporters, as they are told to tackle strong Swiss franc. Its exports constitute 50 percent of its $523 billion GDP. Presently, although SNB has taken measures, its inability to intervene and defend its currency is due to the heavy losses it had to suffer about couple of years ago, as it was unable to halt SFR appreciation and instead Swiss Central Bank had to incur a record loss. It is extremely difficult for any central bank to defend alone its currency by intervening in the market unless the intervention effort is a co-ordinated one. Switzerland s stock market is six percent behind the European stock. The economy is showing signs of a slowdown. Election is due in October. However, I believe that this is a testing time for the SNB, as another break of 0. 7650 would push it towards 0. 7480 or even 0. 7020. Only an upside break of 0. 8450 would reverse the sentiment.
Courtesy: Business Recorder
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