Market Report July 2012 :
Well, it didn’t take very long for a new financial scandal to make the news and, this time, its scope is much, much larger.
The Libor (London Interbank Offered Rate) manipulation (Libor is used to determine most interest rates: mortgages, credit cards, swaps, derivatives, etc) has reached cataclysmic proportions. The Wall Street Journal writes about a fraud of over 800 billions of dollars… and Matt Taibbi, a well-known American investigative journalist, says that this is the biggest financial scandal of the 21st century..
The fact that the largest banks have confirmed that such a manipulation has been taking place brings, as a direct consequence, an acceleration of the loss of faith, globally, in the world banking and financing system.
The events of the last few months ( European crisis, Greece, Spain and Italy) had already fostered serious doubts regarding the stability of the banking system.
This new scandal brings two consequences that have direct repercussions on the gold and silver markets:
1- More defiance towards the banking system brings more investment in the precious metals (physical gold and silver).
2- An awakening, globally, to the fact that gold, like interest rates, might have been manipulated for years.
Gold (like interest rates) represents the true value of currencies. Manipulating its price (to the downside) helps in maintaining trust in the actual fiduciary system and it lets the banks that own large short positions in precious metals easily make profits.
You can watch here a video interview with Ned Naylor-Leyland, the British gold market specialist, on CNBC. Only on CNBC will you find talking heads looking shocked at the prospect of gold manipulation, even after the Libor manipulation has been exposed!
Trying to invest in or to analyze the gold (and silver) market without taking into account the price manipulation is akin to ignoring one of the fundamental elements explaining the fact that gold is still undervalued today, , despite a more than ten-year bull market..
With the acceleration of the breakdown of the financial system, one should expect more and more revelations about the manipulation of the gold and silver markets.
Other recent events should be taken into account, on top of the Libor scandal:
- Another online broker goes bankrupt : after MF Global, now PFGBest is going bankrupt, with $200millions of clients’ money gone nowhere to be found.
Loss of trust in the banking system… loss of trust in the financial institutions (brokers) exposing their clients to counterparty risk (default)… There is actually a movement of funds taking place from the financial sector toward real assets and this is no surprise because, in the actual context, holding any investment with a third party is risky.
- Nationalization of one of the most important silver producing mines in Bolivia: :
If silver were not a strategic metal (both industrially and as money), we wouldn’t witness this type of action from a government like Bolivia’s. This is not an isolated case, and it’s one of the reasons that make it risky to invest in these mining companies exposed to “political risk”.
South American Silver, the mine in question, has seen its share price fall 27% after the nationalization.
Said nationalization will bring:
1- Less physical silver available on the markets, because Bolivia will probably accumulate a strategic silver reserve coming from that mine.
2- A concentration of investments in the physical bullion rather than in the mining companies.
And, meanwhile, back to the central banks:
- More monetary inflationary policies, along with real negative interest rates. Read here why real negative interest rates are bullish for the price of gold.
- Mario Draghi (ECB president) cut down the European interest rate to 0.75%.
- England’s Central Bank has decided to re-inject 50 billion pounds into their “economy”.
- Interest rates on Spanish and Italian bonds surged again after the so-called rescue package of last week, which will force Mario Draghi to print more money, even though he’s saying otherwise.
- The Bank for International Settlements (BIS), a sort of central banks’ central bank, wants to reclassify gold as a Tier One asset , or risk-free, in its projected Basel III regulation.
Scandals, brokers defaulting, nationalization, revelations coming out on frauds (interest rates and gold)… In time it will be impossible to manipulate the price of the precious metals, and the central banks’ inflationary policies will greatly favor the precious metals markets in the mid- to long term.