The week of May 13 2013, in Review -Ongoing Currency War-

A pile of nice shiny gold barsInterest Rate Down

Dear PGM Capital Blog readers,

In this weekend blog edition, we want to discuss with you some of the most important events that happened in the global capital markets, the world economy and the world of money which are:

  • The price of Gold testing the low of May 15, 2013, of USD 1,350.00 an oz.
  • The Central Banks of South Korea, Israel and Turkey to lower interest rates.
  • The price of silver to end the week on a two-year low of USD 22.32 an oz.
  • Japan’s Economy grew with 0.9% in Q1-2013.
  • Palladium recovers completely from April 12-15 Crash and closed near 52-week high.

The price of Gold testing the low of April 15, 2013.
From May 9 – 17 2013, the gold price took a dive from USD 1,470 an oz. to close at USD 1,364.70 an oz., on Friday May 17 2013, just above the low of USD 1,350.00 close of Monday April 15, 2013 as can be seen from below chart.

gold_60_day_o_usd

The decline of the price of Gold during the last 8 days is mainly due to technical reasons, for which Gold went through key support levels and subsequently triggering programmed stop-losses which have activated a spree of selling of the yellow metal and by doing so pushing the price even lower.

Most Gold investors may be asking themselves whether the price of USD 1,350.00 has hit the bottom or whether gold will go even lower. What people never have to forget is, that any market is always dominated by fundamentals and by psychology. With interest rates at or near zero and central banks all over the world printing money, the fundamentals for gold have never been as strong as they are right now. However, at the same time, with gold continuing to break through key support levels and with the media telling everybody that the gold bubble has burst, it will be very difficult to predict a short term price direction for Gold.

However, there is a very important point that we have to take into consideration when evaluating the price of fine Gold (99.99), which is the production costs of Gold.

When reviewing the latest earning report of major Gold producing companies, we see that most of them are in the red or have experienced decreasing earnings and that their average breakeven costs are between USD 1,200.00 – USD 1,400.00 an oz., with outliers on both side, dependable of the region and type of mine (open pit- or underground mine).

According to an article by “Seeking Alpha” the average production cost of Gold was in Q4/FY-2012, USD 1,399.70 an oz. as can be seen from below table.

cost of mining gold

Source:

An average production cost of world global miners -excluding write-downs- of USD 1,399.70 an oz., is higher than the closing price of Gold of Friday  USD 1,364.70 an oz., which means that if the price of gold remains at this level or even goes lower, most gold-miners will come into the red or will go deeper into the red.

The interview in below video clearly shows how higher production costs and lower gold prices affect gold producers worldwide. 

The Central-Banks of South Korea, Israel and Turkey to lower interest rates.
In order to promote their export, and decrease the upward pressure on their respective currencies the central banks of South Korea, Israel and Turkey have taken the following measures:

  • On Thursday, May 9th 2013, the Central Bank of South Korea lowered the key rate with 0.25% to 2.5%.
  • On Monday, May 13th 2013, the Central Bank of Israel, lowered the key rate with 0.25% to a 3 year low of 1.5%.
  • On Thursday May 16, 2013, the Central Bank of Turkey, lowered rate with 0.5% to 4.5%.

As a consequence of this the Israelian Shekel and the Turkish Lira closed the week of May 13, with approx. 10% down, as can be seen from their respective one year-chart.

1 year chart Israel Shekel – USD

1 year chart Turkisch Lira – USD

The price of Silver to close on Friday, May 17, 2013, at 2-year low
As can be seen on below chart, the price of silver after going through the key support level of USD 22.62 an oz. around noon, closed at a two-year low of USD 22.34 an oz on Friday, May 17, 2012.

silver_2_year_o_usd

Silver and gold are both real money, which cannot be printed by Central Banks. Beside this, Silver also has an industrial use, for which 90% of all mined silver has been consumed in several industrial products. On top of this silver is a key component for the production of solar energy.

On top of this, accordancing to analysts, silver has already passed its peak production and cheap producible silver may be very scarce by 2020.

Japan Economy grew with 0.9% in Q1-2013
Based on massive money printing by the Japanese central bank, the country’s GDP growth came to 0.9 percent for the January-to-March period compared with a year ago.

Since the inauguration of Japan’s current prime minister “Shinzo Abe” on December 26, 2012, the Japan’s Central Bank has printed out of thin air an average 81 billion Yen every month. This money printing exercise, when compared to the size of Japan’s Economy is 3-times bigger, than the current QE-3 program by the USA FED and has diluted the value of the Japanese Yen with approx. 32% in the last six months as can be seen from below chart.

JPY-USD 5 years

Palladium to recover from May 12 -15 2013, sell off.
On Friday May 17, 2013, Palladium closed at USD 736.00 an oz., above its closing price of Thursday May 11 2013, and only USD 45.00 an oz., or 7% shy of its 52-week high of USD 781.00 an oz. as can be seen from below chart.

Palladium 1 year chart

The above clearly shows that we are now entering a crucial phase of the ongoing currency war, a phase in which on the one hand, countries will depreciate their currency in order to inflate their stock markets and promote exports, while on the other hand their respective central banks will work overtime in their efforts to manipulate the price of Gold and Silver down.

With key interest rates near zero, depleting silver production and current Gold prices below their average production costs, we believe that we are at a very decisive point in the ongoing currency war and subsequent big shift of wealth.

In a currency war, the country to win this war is the country that has depreciated its currency the most and has subsequently diluted the purchasing power of its citizens the most. In the end this will lead to; poverty, riots, strikes and an upwards wage spiral, which will result in a vicious circle of diluting currencies, inflation and wage increases. Those most hurt in this vicious circle will be, savers and retirees living on a pension.

We believe that based on the above, investors shouldn’t panic because of the falling Gold, Silver and other precious metals and sell-out, but to use this unique opportunity and the discrepancy between the future’s market and physical market price, and systematically add more Gold, Silver and other precious metals to their portfolio.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely,

Eric Panneflek

 

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