Commentary

In the past four days gold has rallied from low to high of over $50 an ounce, which has left me with the impression that until $1481 in the December Comex Gold is broken that a bottom of importance is in place. The current rally is “V” shaped, meaning that it probably captured those short the market and forced some short covering while at the same time is attracting those who think the rally has left them behind.

So why the sudden rally? Below is my take on financial events now impacting gold.

As I see it the reason for gold’s current rise is directly linked to European sovereign debt issues and lack of a resolution concerning the US debt ceiling. These concerns have created a situation where gold acts as a proxy for world unease. Central bank buying may also be at work as some central banks are wary of holding too much of any currency in the current environment. Last, it’s important to keep in mind that it’s summer. My experience has been that summer markets can move sharply at almost any time and don’t need a lot of trade volume to do so.

Just days ago, this past June 22nd, December Comex Gold hit a high of $1561, which was just $15 shy of this contracts all-time high. I believe the reason behind the at that time was due to uncertainty whether or not Greece would succeed in getting that round of its much needed financial bailout. Germany was balking at writing a check without Greece agreeing to austerity measures. Greece held a vote in which its parliament agreed to the terms demanded by the EU and IMF and enacted into law shortly thereafter this decree. Prudence prevailed after the vote and Germany came to the table contributing to the rescue package, even though this politically an unpopular more in Germany. After this took place, gold lost part of its “risk premium” and fell to a low on July 1st of $1481, an $80 in eight days break from its most recent high.

That brings us to today where it’s become apparent that the Greek problem hasn’t really been resolved. Greek financial issues were simply kicked down the road and that road is proving to be a short one as Greece will very soon need a much larger round of funding if it is to stay afloat. These funds are due in part in the fall. There is no surprise here as this was known by all at the time the $13 billion or so was given to Greece.

France came up with a plan to have private investors, primarily banks, take a “haircut of sort” by rolling debt forward and by potentially lowering the interest rate paid on the Greek debt private investors held by in part having new bonds issued, replacing bonds already held by these investors. The plan was based in part on hope that private investors would voluntarily comply rather than lose their investments in totality. There was and remains in place an implied threat that if private investors did participate, whether voluntary or not, the haircut could/would take place anyways.

This brings us to today. The big three credit rating agencies, Moody’s, Fitch and Standard and Poor are threatening to term restructuring of debt already issued a default, whether voluntary of not. It appears that the agencies have taken the position that this proposed shift in the structure of outstanding debt will be termed by them a default. If they label the debt to be in default it brings into question the value of the Greek debt collateral those private investors along with the European Central Bank holds. Simply put, the value of the collateral behind the debt has to be accounted for which if downgraded impacts banks capital, which in turn puts into question a bank’s solvency. This impact is not limited to Europe as it probably impacts all who hold Greek debt.

The European Central bank is against any solution that involves a “selective default” or any other credit event. At the same time, just today, the ECB extended an olive branch of sorts to Portugal. Simply stated, the ECB said it would continue to lend against debt issued or guaranteed by the government. This puts more pressure on France and Germany to not go forward with their respective voluntary “haircut” plan and backs up the three credit reporting agencies stances.

Add to all this the debt ceiling poker game being held in Washington and there’s plenty of reason to see why there is probably central bank buying of gold taking place. I think of the debt ceiling issue this way. We the taxpayers are poker chips. Piles are on each side of a poker table, which is played out by both Republican and Democrats who are going to see their chip piles get a bit smaller. Neither side can win pot, but the game goes on with piles shifting from side to side but the house continues getting its share the chips. The question is who’s the house?

As you know from my two last Gold Reports, I think that gold will rally into year end.

The higher the base gold now makes, the better the odds of gold hitting a new all-time high later this year. This is not yet the seasonal time of year when gold turns up, so I expect spikes both up and down are part of gold building a base for higher prices to work from.

Seasonal Gold Chart

According to a report issued by USAGOLD (www.usagold.com), from the end of July to the end of December the following gains and losses have been recorded since 2001.

• 2001 + 2.8%
• 2002 + 7.9%
• 2003 + 18.0%
• 2004 + 10.1%
• 2005 + 20.0%
• 2006 + 2.8%
• 2007 + 26.2%
• 2008 - 5.0%
• 2009 + 15.7%
• 2010 + 15.9%

I think the above to be a compelling reason to be looking for even higher gold prices in the latter part of this year. Keep in mind that there was a recent year where gold did lose 5%, so a rally doesn’t always occur.

Summary

As I wrote in my last report; “I remain both medium and longer-term very bullish. Seeing $1600 an ounce plus is my expectation.”

Expected support at 1537 in my last report did not hold. Those who followed my trade recommendations at that time did very well as my recommendation had you get out of my recommended long position near 1550. .

For those who want to follow my trade recommendations you might wish to consider doing so by clicking here.

From what I see, until $1481 in the December Daily Chart and $1480 on the Weekly Chart is taken out the odds favor that gold is now bottoming out and getting ready to move higher into year end.

It would not surprise me to get a new buy signal between now and the next Gold Report in two weeks. I will advise when to do so in via my Twice Daily Recommendations.

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By Ira Epstein