Newsroom

The Week in Review – November 18th, 2011

November 18, 2011

JP Morgan et al appeared to be at work again this week, using Thursday’s market activity as cover to hammer the prices of precious metals down once again, creating what may be a perfect buying opportunity.

On Friday, it appeared that the “super committee”, which has until midnight on Wednesday to come up with a way to find $1.2 trillion in savings over the next 10 years, was on the brink of collapse. Democrats and Republicans in the committee seem to be unable to agree on the specifics of tax increases and cuts to benefits. Should the “super committee” fail to reach a deal, automatic spending cuts which would be split evenly between military and domestic programs would kick in beginning in 2013. Once again it appears the US Congress is taking things right down to the wire and the voting public appears to be growing weary of it. 2012 should shape up to be an interesting election year.

Initial claims for unemployment fell again this week to 388,000 and even the 4 week moving average, generally believed to be a better indicator of the status of the jobs market, fell below 400,000. Once again it is worth mentioning that as the holiday season approaches unemployment numbers typically decline as retailers hire workers for the temporary holiday rush. Since those workers are often let go after the holiday season is over, it will likely be January before the true status of the jobs market can be judged again.

Mario Monti took over as Italy’s Prime Minister on Wednesday, replacing Silvio Berlusconi and completely overhauling the Italian government. Monti also announced that he would be the Finance Minister for the time being until a “suitable candidate” can be appointed. The new Italian government is now composed entirely of unelected technocrats and Monti overwhelmingly won a vote of confidence in both houses of Italy’s government on Thursday and Friday. Prime Minister Monti has vowed not only to implement the austerity reforms passed by the previous government, but to add even more austerity measures to attempt to bring Italy back from the brink of financial ruin.

News out of Greece was relatively muted given the events happening in Italy this week. Quickly moving to the front burner however is a loophole that has been exposed in Credit Default Swaps as a result of the deal reached in October for Greek bondholders to take a 50% “haircut” on their existing bonds. CDS contracts are supposed to offer “insurance” against a bond default, but it turns out that the deal reached on Greek bonds, which is technically a default, will not trigger payouts of the CDS contracts purchased against those bonds. According to the International Swaps and Derivatives Association, the plan announced by Eurozone leaders in October failed to meet the “fine print” definition of a default under ISDA rules. According to ISDA rules, payouts can only be made if a restructuring is mandatory or if a “collective action clause” is invoked. It turns out that 90 percent of Greek government bonds have no such clause and the deal announced by Eurozone leaders stated that the 50% “haircut” was voluntary. Why does all of this matter? Deutsche Bank decided to reduce its exposure to Italian government bonds earlier this year by purchasing CDS contracts on them, allowing them to reduce their net exposure from 8 billion euros down to 1 billion euros. If those CDS contracts don’t qualify for a payout then Deutsche Bank’s exposure to Italy increases by a factor of 7 over what they are reporting since their CDS contracts might not get paid out. The question is, how many other banks find themselves in this same situation?

Next up on the news horizon out of the Eurozone is Spain. Spain sold 10 year bonds at a yield of 6.975% this week, the highest that country has had to pay since 1997. Yields were headed even higher after the auction until the European Central Bank intervened.

Crude oil crossed the $100 a barrel barrier once again this week before dropping back into the upper $90 dollar ranges during Thursday’s market downturn.

The euro continued its decline against the dollar this week, still pressured by the uncertainty in the Eurozone over its sovereign debt woes. The Japanese yen climbed against the dollar at the start of the week, but then traded flat against it to finish out the week.

Friday to Friday Close

Previous Year Comparisons

* Current at time of writing

Here are your Short Term Support and Resistance Levels for the upcoming week.

Volatility should be expected to continue. JP Morgan et al engineered another price decline this week that may be presenting an excellent opportunity to purchase precious metals at a discount. The fundamentals that support owning precious metals in your investment portfolio are still present, and even seem to be becoming more firmly entrenched. Jeff Clark, of Big Gold, writing in the Casey Daily Dispatch this week made a perfect case for taking the long term view on investing in precious metals and buying price dips as they occur. Mr. Clark charted gold price corrections of 8% or more on a daily, monthly, quarterly and annual basis beginning in January of 2002 and ending in September of 2011. When charted on a daily basis, there were 10 corrections of 8% or more that appeared. On the monthly chart that number drops to 5 corrections of 8% or more, in the quarterly chart there is one correction of 8%, and when viewed on the annual chart, there are no visible corrections at all. The annual chart shows a steady increase, with no corrections to the downside, from 2002 to 2011 of more than 433% in the price of gold. If that doesn’t make the case for long term ownership of precious metals, I don’t know what other evidence you need. The IMF this week refused to release the next tranche of bailout funding to Greece saying “It’s important that the unity government now shows its commitment to the implementation of the economic program.” The IMF went on to say further that the review and release of the tranche can occur once “broad political support” is assured. The new and un-elected governments in both Italy and Greece face seemingly insurmountable odds as they try to rein their spiraling debt issues in and pull themselves back from the brink of financial ruin. The yields on the Spanish bond auction may be indicating that Spain could be sliding into the debt sewer behind Greece and Italy. Smaller peripheral countries such as Portugal and Ireland that are suffering their own sovereign debt woes seem to have completely fallen off the news radar when compared to the size and scope of what is happening in Greece, Italy and now perhaps Spain. The “super committee” in the US Congress looks to be devolving into bickering and arguing amongst themselves as has so often been the case with this particular Congress. Failure to reach a deal on spending cuts by next week’s deadline may lead to another credit rating downgrade for the US. All of these events seem to be adding to the fundamental reasons for owning precious metals in your portfolio. When taking the long term view, as PMI has always stated should be the approach to investing in precious metals, Mr. Clark’s charting exercise shows that purchasing additional precious metals when presented with a price dip would have yielded you progressively higher returns as the years went by. Remember that precious metals should be viewed as a long-term investment and that the key to profitability through the ownership of physical precious metals is to actually own the physical products and to hold them for the long term. Never over-extend your ability to maintain ownership of your product over the long term.

Trading Department – Precious Metals International, Ltd.

This is not a solicitation to purchase or sell.

© 2012, Precious Metals International Ltd.
www.wwpmc.com

The Week in Review – November 18th, 2011
Posted by Worldwide Precious Metals on Friday, November 18, 2011

• Home
• About Us
• Info Request
• Open An Account
• Bullion
• Newsroom
• Testimonials
• Contact Us
• Client Login
• Sitemap