On Thursday, gold futures for December delivery jumped $24.20 to settle at $1,747 per ounce, while silver futures gained $1.80 to close just above $35.  With the EU plan crafted, where does gold and silver go from here?  Unfortunately, the plan does not instantly solve the financial problems of Greece, let alone the world.  The plan calls for the EFSF to be increased to 1 trillion euros, by leveraging the fund.  The leverage could be done by two ways, either by loss guarantees to buyers of euro zone debt, or by a special purpose investment that will be created in the coming weeks, in hopes to attract investment from China.  “The leverage could be up to one trillion euros under certain assumptions about market conditions and investors’ responsiveness in view of economic policies,” said Herman Van Rompuy, the president of the European Council.”  This begs the question, how will more leverage solve the financial mess in the euro zone? Leveraged debt is what ignited and intensified the credit bubble.  If anything, the EU plan provides more uncertainty about the long-term financial stability of markets.  When uncertainty and debt rises, gold and silver tend to do the same.

Greece’s current debt burden is 160% of its GDP.  The 50% haircut on Greek debt will reduce the country’s debt to 120% of GDP by 2020.  Does this sound like an ideal situation?  “Even if investors fully sign up to the plan, this would still be an unsustainably high level of debt,” said Jonathan Loynes, chief European economist at Capital Economics. “Accordingly, further Greek restructuring or defaults seem very likely in the future.”  The EU plan sets the financial markets up for more disappointment and more money printing.

The EU plan also requires banks to hold higher quality assets on their books.  Core tier one capital levels will be raised to 9%, which means that euro zone banks need to raise roughly 106 billion euros to meet the new levels.  Banks may need to receive government support if they cannot raise the money on their own.  The EU plan says that “guarantees on bank liabilities” may be needed to assist banks.  The key question is, how will EU governments pay for all these actions?  “European bank recapitalization remains an aspiration rather than a reality,” said Ian Gordon, a banking analyst at Evolution Securities in London.

I believe this is not the last bailout plan that Greece will receive.  Greece already received one bailout of 110 billion euros in May 2010, and will likely need more bailouts going forward.  Bailouts do not solve massive debts and spending problems that plague many countries.  Attention is already focusing on Italy, which just saw its 10-year bond price at record levels.  Gold and silver are hedges against the debt ridden world that we live in.  As investors lose confidence in governments and countries, precious metal prices will continue to rise.
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How will precious metals react to the EU bailout plan?

The index with an average market capitalization of US$7.7bn was outperforming a lacklustre broader market with bellwethers Barrick and Goldcorp also making substantial gains. Weak economic news from Europe, lingering concerns about the Greek debt crisis and media reports that China may raise interest rates have lured investors back to precious metals.

Number three Canadian miner Teck Resources up 1.1% was one of the weaker performers as slower economic growth in China would dampen demand for the miner’s products – primarily copper and other specialty minerals with only limited output of silver and gold.

FX MM reports:

Risk appetite has weakened after reports that China could raise interest rates this weekend and that the country could be underestimating the number of bad loans held at local banks.

The index can be followed here.
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Canada precious metal stocks on rampage led by silver

The summer doldrums are in full flow, so seasonal weakness is to be expected. However it is during this period that the most money can be made, since it can be used to establish positions in anticipation of the next major move in gold. As the great Chinese General Sun Tzu said “Every battle is won, before it is ever fought.” The big money in the last major move wasn’t really made as gold hit $1425 in November or $1550 in April, it was made during the summer weakness of July and August when gold traded at less than $1200. The trades that are placed and investments that are made over this period can bring fantastic returns when the more exciting time of year comes around.

Having fallen roughly 6% from its highs around $1577, we now think that the downside for gold is limited. Technically speaking we are seeing some important support lines and the 150 day moving average converge around $1445 and we therefore think it is unlikely that gold prices will fall past this level.

In addition to this, the Relative Strength Index for gold currently stands at 36.76. Historically speaking, if the RSI falls to 30 it is a screaming buy signal. We aren’t seeing that screaming buy signal just let, but it could be just around the corner.

Looking to the fundamentals that drive gold, we think fears over the Eurozone crisis will continue to subside (despite the longer term underlying problems remaining unresolved). In additional to this, money markets are now fully pricing in a hike by the ECB in July and the December Euribor interest rate futures indicates that there is roughly a 70% chance the ECB will hike again in 2011. These two factors signal to us that the Euro is likely to go higher, the US dollar lower and gold priced in dollars to increase. Keep in mind that the ECB’s main objective is price stability, ie to control inflation, as opposed to the Federal Reserve’s dual mandate to strive for full employment as well. Therefore the ECB can be considered more likely to hike relative to the Fed, leading to some possible interest rate differential induced strength in the Euro against the Greenback.

Taking a technical look at the USD Index, the 76 level appears to be offering significant resistance. This is also the same level that the USD bounced off in November 2010.

Whilst some choppy lateral motion is possible in the short term, we think the dollar will endure a serious decline in the medium to long term, coupled with the next major rally in gold prices.

Another factor being discussed that could possibly cause a large move higher in gold prices is that of a possible QE3. At present we do not see much likelihood of a QE3 program, at least not in the same nature as the previous quantitative easing programs. However we do think US monetary policy will continue to be supportive of higher gold prices, with the Fed keeping rates at zero and the TIPS yielding negative rates for multiple maturities (Please see our previous article: The Key Relationship between US Real Rates and Gold Prices).

Equally as important as devising what the move in gold will be and when it will occur is how one trades the move. This is a point that is often not given enough emphasis. As we have stated before, we think options are the best way to trade these moves. No other instrument can offer opportunities that options offer. Using options one can create a position that exactly matches one’s view on the market. Suppose one agreed with the views expressed above, that gold would not fall significantly. Using options one can be rewarded for the exact scenario. Gold stocks, futures or ETFs cannot offer that flexibility or adaptability, they simply offer the investor the chance to bet up or down.

It is for these reasons that options trading offers up many attractive opportunities from a risk-reward viewpoint. We specialise in indentifying these opportunities and executing trades to take advantage of them. We have executed 81 trades since inception, with 78 closed at a profit and an average return of 40.41% per trade including losses. Our model portfolio is up 338% since inception but over the same period gold is up only 55%, the 200% leveraged gold ETN (DGP) is up 115% and the HUI gold stocks index is up 40%.

In conclusion, if one has a long term bullish view on gold then this is the summer shopping season so try not to get too tied up in the day to day market action. Keep the big picture in mind. This gold bull has a while to run yet. We are not perma-bulls and do not consider ourselves “gold bugs”, we simply see market conditions as bullish for gold in the longer term. Recently we sold all our positions in gold banking profits and more than doubling our money, just before the May correction took prices down as low as 1461. If you would like to subscribe to our options trading service, SK OptionTrader, then you can do so at www.skoptionstrading.com. Our service offers market updates and both buy and sell trading signals on US options, with a strong focus on gold. We also run a model portfolio and give suggested capital allocations with each trade.
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The downside to gold is limited

Ahead of New York’s opening gold was trading at $1,523.35 down $21 and moving in line with the euro’s fall.   In the euro, gold stood at €1,075.43 up €2 on yesterday.  The euro was going weaker at €1: $1.4165.

Silver is still under the influence of the London silver fixing, which was set at $36.01 barely changed on yesterday but fell to $35.92 ahead of New York.

Gold – Very Short-term

Dollar gold is likely to be steady to stronger today in New York.

Silver – Very Short-term

Dollar & euro silver price should be steady to higher in New York today.

Silver & Gold Price Drivers

The see-saw has just tipped to the side of harsh reality.  With €300 billion owed the Greeks can never fully repay that debt, even if they moved out of recession and had a fantastic decade-long boom.   So what can the creditors do?   In 2013 they know Greece can make an orderly default with the public sector of the E.U. carrying the burden.   So the E.U. must adjust the debt burden through voluntary extension of the debt and perhaps voluntary lowering of capital repayments.   This will allow the banking system to manage the debt so that it does not look like a default, when in fact it is [‘a rose by any other name smells as sweet’].   The issue is now about the survival on the banks and the E.U. and the level of the euro internationally.

The Greek opposition will not support the austerity measures. So now that tiny majority of Greek MP’s will be nurtured very carefully. But this time it is not a test of loyalty, but a test of voter support. Will they get it? So the risk of default in the near-term remains hanging over the market. This is gold and silver positive! The certainty of default in 2013 is there not just for Greece, but for the rest of the debt-distressed E.U. members.

With the Congressional Budget Office in the States sending out alarming, U.S. debt signals, the state of U.S. debt is now firmly on investor’s screens.   This lessens confidence in the dollar and brings the probability of a U.S. debt crisis into view in the next two years, as well. Combined, the U.S. and E.U. debt crises are visibly undermining confidence in their respective currencies. The stronger gold price is beginning to illustrate this as well as to confirm the correctness of investor’s positions in gold and silver.

How can such embattled currencies stand as adequate measures of values?  Debt default or not, the damage has been done.

With the see-saw tipping back to harsh realities, we are watching a fundamental positive factor being added to gold and silver’s fundamental support, just as an individual’s loss of creditworthiness undermines his financial credibility, only this time it’s the world’s major powers.

[The Gold Forecaster and Silver Forecaster are a “must-read” for all who want to understand why the gold and silver prices are moving as they are and why.]

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Gold and silver’s daily market commentary