Currency Crisis Will Drive Gold

Currency Crisis Will Drive Gold

By Neil Charnock


We have a really big flightless bird Down Under called the Emu.  I will not draw absolute parallels between the European Monetary Union (EMU) and the Emu, even in jest, however the Euro looks like it will appear flightless at best this year.  Perhaps the myth that they (Emu’s) bury their head in the sand when facing danger may come true for the EMU this year however don’t count on it.  Dire monetary events may force a change of heart and a dose of reality.  This region will not be the only source of upheaval and volatility this year as I shall discuss below.

The game has changed guys, things are not back to normal and the international spin machine will not make things any better.  Spin will not help any more than excessive stimulus funds could which was, after all, a dangerous policy “solution” that flagged further flippant & flagrant disregard for monetary history by the Central Banks.  You cannot print wealth or spend your way out of debt.  Bailing out the banks shifted the mess onto the Government balance sheets to avoid a total collapse of life as we know it.  This can only come to an ugly end as the piper still has to be paid eventually.

Shifting the mess from the banking sector to Government is much like cleaning up your kitchen by throwing the dishes and food scraps into the bathroom.  This makes the kitchen look nice and perhaps you can then do some cooking however try using the bathroom and see how you go then.

The public are still mostly clueless to the fact that this set of economic circumstances is nothing like any of the recessions faced since the great depression.  The gold rally has hardly started – more on this below as well.

Sorry I made an error

But first let me apologize and retract a mistake I made in my last article.  I made the fatal error of not checking a comment that had been passed to me by email from a trusted source.  I added it to the last article as I thought it was an interesting snippet of data.  I should know better than to not check my data.

I actually miss-quoted Glenn Beck on the Obama Administration which is a bit of an irony in itself given his reputation – any way I wish to totally withdraw that statement as false.   I will not be quoting Mr. Beck again.  Sincere thanks to all the good citizens of the USA that alerted me to the error of my ways – I stand corrected.

Back to business

Gold is going to shine for one very important reason – what other currency do you trust?  The upward pressure will remain as the fundamentals for gold have not changed.  Gold stepped up to the plate and resumed a stronger monetary role over the past few years and this will continue as funds chase capital growth and wise paper money owners chase safety.

Liquid assets will be well bid to start and this includes the equities – the stock markets.  I still like gold and energy as the main play in the first half as per my Outlook for 2010 article last week.  The investment and money flows do not look likely to include less liquid assets like real estate.  Bonds don’t look attractive by any measure either as indicated by severely reduced sovereign appetite and Pimco’s retreat from this investment class.

There is still plenty of money out there and it has to go somewhere.  Take a look at the XGD already this year in Australia.  It bounced off the lower channel after retreating into the buying opportunity we predicted for the end of the year back in October / November.

The XGD is now beginning to climb the stairs up along the top Bollinger Band and is looking good so far.  One of the key stocks identified in a special report in our Gold Members area last year (on the 27th August at 2.7c) is now trading at 7.4c with further upside.  We are working on two similar reports and planning a third as I write this article.


Europe is a problematic economic region and now the stronger economies of Germany and France are also faltering.  Of course Spain, Italy and Greece found out that their monetary policy arsenal of sovereign interest rate controls were no longer available under a joint currency.  This year is shaping up even worse for Europe than the US as things potentially come to a crunch.  The US hogged the limelight last year for all the wrong reasons and none of those conditions have really changed to any significant degree.

Could we see new sovereign near or actual defaults this year?  Structural imbalances still abound in most parts of Europe but what about Japan?  As the IMF said of the global economy; “Nonetheless, vulnerabilities remain and complacency must be avoided.”


“Financial institutions will likely face “somewhat lower” write-downs on bad debt than expected in the last report in April, when the fund estimated that global losses could top $4 trillion through next year, but it didn’t provide a revised figure”.  Editor: this is what I am referring to when I talk about buying time for restructure of balance sheets – phew $4 trillion!)

While progress has been made in recapitalizing U.S. and European banks, financial instability remains the main risk to an expected recovery next year (2010), the fund said. Moreover, though it is too soon for governments to start unwinding crisis measures, clear and coordinated exit strategies need to be laid out to avoid a potential new wave of turmoil in sovereign debt markets, it said.  The IMF also warned – A number of emerging economies remain vulnerable to external shock, with corporate borrowers facing limited access to financing for rolling over debt.

I would have thought that this warning should be applied to the global economy and global corporate community not just emerging economies.

Japan’s economy is also showing signs of stabilization, with aggressive fiscal policies and strength in regional economies expected to provide further support to growth, the fund said. The economy is expected to contract 6% this year, instead of a previous forecast of a 6.2% decline, with the 2010 growth estimate raised to 1.7% from 0.5%.

Well that is the official line from the IMF and I hope they are right.  My analysis indicates that the figures for Japan are optimistic and that they may need to stimulate heavily this year.  If this comes to pass it will be due to ill winds and the printing (stimulus) will cause weakness in the Yen.  Here is a long term USD: YEN chart showing a falling wedge.

You will also note a major divergence has formed between this ratio and the RSI on this weekly chart.  The MACD has turned up and may cross the zero line in the coming weeks.  This tends to suggest that the Yen strength in relation to the USD may be nearing an end.  These long term patterns and trends change slowly so I will be watching for the move when it comes and breaks out above the down sloping resistance line.

Is the chart pointing to problems in Japan or just relative strength in the USD.  Time will tell. Standard & Poor’s Ratings Services expect a slowing of the quarter on quarter growth in the 2nd and 3rd quarters of last year.

On the local scene – The XMM All Metals and Mining 300 Index is also shining on growth expectations and current numbers including a projected 8.5% growth in China this year.  The XEJ Energy Index is showing great strength also so I am preparing a report on a highly promising and highly undervalued energy stock for Gold Members only (initially before full public release).

Australian Gold Sector

We have just introduced a new low cost mid tier producer into our Members and Gold Members areas this week and will now assess a major merger.  All is on course from my intraday prediction from the 18th December when I highlighted the exact bottom of the XGD before it recovered over 10%.  We announced the initial breakout earlier in the year as well.

Our projections still run out to April for a top in gold stocks and May for physical gold and silver.  I am not prepared to attempt to predict any further out than that as I need to see what the markets and technicals are telling me as we progress into the highly interesting year.

The chance of the gold and gold stocks taking charge and running their own race is increasing so any corrections may be smaller this year.  Just because we see some chance of USD strength against the Yen and possibly the Euro does not mean gold will correct.  It could out pace the USD even in a stronger relative USD environment.

We see the stimulus continuing despite the talk of withdrawal.  These measures aimed at the necessary task of keeping the game afloat will be great for gold.  The demand from those in the know will keep the upward pressure on gold too.

The chance of the AUD appreciating against the Euro and the Yen should keep investment flows coming into the Australian gold sector and energy equities as well.