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Will the Greek Bailout Make Gold, Silver Rise or Fall?

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Published : February 22nd, 2012
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( 6 votes, 4.7/5 ) , 6 commentaries
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Some investors may feel that the Eurozone debt crisis has been resolved by the bailout from the other E.U. members. Whether it has or has not, is irrelevant to the price of gold, or is it?

There are still hurdles in the way, such as the acceptance by private Greek Bondholders of the 53% haircut and low interest rates they will get until 2015. But let’s assume the best and believe they’ll accept the terms. The first market reactions were to move up and hold new levels without any effervescence in any market. The moves had largely been discounted already. Yes, we’re seeing a shift of money from the U.S. Treasury market to the euro but not in large amounts yet. In this piece we look at the overall prospects for the precious metals.

Greece: What Remains?

One can spin the story any which way, but the cold reality is as follows:

1. Greece has defaulted on its debt and has had the entire debt situation re-worked in the light of its default.

2. Greece’s economy is moving, if not already there, into a Depression (so far statistics record a 7% contraction of their economy and this continues to shrink). This means that government revenues are also shrinking rapidly. The national pastime of Tax evasion is expected to be spurred by this.

3. The interest rate on the debts, at 121% of current Gross Domestic Product, while at 2% on the remaining debt, may swamp government revenues. Greece will need international aid to avoid bankruptcy despite this package.

Other Debt-Distressed Nations

Portugal, Spain and Italy remain possibly in need of a bailout too. Their plight confirms that the debt crisis of the E.U. remains intact. There is little hope of better times!

What the E.U. needs now is to see a significant leap in government revenues in these weaker nations. That is not on the horizon of the E.U.!

With the Greek bailout now confirmed, we may see a rise in interbank liquidity and a pick-up in money velocity with it even reaching as far out as the capillaries of the business body. But do we expect growth to jump, which it needs to, if the debt crisis is to be contained let alone resolved? It will take Asian style growth (or heavy inflation) to make developed world debt drop to “comfortable levels” as a percentage of GDP.

The State of the Gold Market

Where Prices are Made

The developed world markets dictate the day-to-day moves of the gold and silver prices because these are the centers for supply and demand. The rest of the world has to come to these markets for the best prices, the most liquid markets, and to be able to source and sell the largest quantities of precious metals in the world. This will not change for a very long time.

Yes, China as it develops its own markets, may come to share or even dominate precious metal markets as it will provide the greatest demand levels. Even though they’re the largest gold producer in the world right now, we don’t say supply levels because most if not all of its supply does not reach the open market. (We’re of the opinion that Chinese gold production will end up in the government’s reserves.)

Therefore the quickest short-term response to the seeming resolution of the Greek debt crisis will be seen in the developed world’s precious metal markets, particularly at the London Gold Fix. We’ve seen the instant response, to take prices only slightly higher, initially.

Longer Term

Global demand for precious metals does not emanate from the developed world, except for a small percentage [see table]. In what can be confusing for investors, the bulk of demand comes from the underdeveloped world and is channelled into the developed world’s markets through the global network of banks.

The net result is that developed world markets can shove prices backwards and forwards in the very short-term but are subject to emerging world demand pressure over the longer term. These will dominate the trend.

The second major price factor on longer-term prices that dominates short-term prices is demand from the emerging world’s central banks. The recent report from the World Gold Council confirms that central bank demand equals the supply, which the developed world central banks gave at their peak levels when they were selling gold. So the turnaround from around 450 tonnes supply is now around 450 tonnes of demand. That’s a major structural change in the dynamics of the gold market.

Indeed, the lesson we take from the debt crises on both sides of the Atlantic is that we would be foolish to ignore history and the way it is being expressed now, in the debt crises, when contemplating currency investments long-term.

Gold has become a far more respected investment than it has been for more than 40 years right now. We’re seeing it pull countries like Iran, Sudan, and (behind the scenes) some European nation out of a mess, as it facitilitates international loans and lowers interest rates. It is allowing international trade when nations cannot do so because of their current situation. This confirms its direction in the future; it also confirms its important role in the future of the global monetary system.

Central Bank Buying Gold in Changing World

Why else are Russia and China accumulating larger and larger reserves? Why are so many nations from the Far Eact to central Asia to South America and so on, slowly and steadily buying gold? When we look ahead some years from now, we do see a very different shape to the world than at present. East will be as, if not more, wealthy. Political divisions will have increased as emerging nations refuse to bow to the dictates of the developed world. The developed world will have lost its dominant position. In such a world financial changes, stresses, and patterns of trade will demand a move from trust in one dominant nation’s currency to an acceptance of many, some of which will be new. The change will force the older currencies so long over-issued, to face that reality. Preference in foreign exchange reserves will reflect the new doominance realities of international trade. This will mean selling currencies like the Yen, the dollar, the pound, etc. Such structural changes will bring about crises of values, and we will see currency crises the like of which we have never seen.

Gold as Currency

Gold will remain the backstop currency. It will always inspire confidence in its value. Its role in foreign exchange reserves will increase in line with its global acceptance. The campaign by governments against gold, as part of the system will be long forgotten, and a resurrection of its past respect will come naturally.

Seen in that context, the issue of Greece can be seen in its proper perspective. The Greek debt crisis is a symptom of a longer-term, larger problem of government-controlled, government dependent, government valued instruments of exchange with no inherent value. Seen in that light, we cannot see how currencies alone in such a changing world can do without the backing of gold, to ease the strains of commerce, banking and most important of all, value measurement.

Gold will not replace currencies in the current monetary system, but it can and will support them. Consequently we do not see gold or silver falling on this news…but rising!



Companies Mentionned : Central Asia | Metals X |
Data and Statistics for these countries : Greece | Russia | Sudan | All
Gold and Silver Prices for these countries : Greece | Russia | Sudan | All
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Julian Philips' history in the financial world goes back to 1970, after leaving the British Army having been an Officer in the Light Infantry, serving in Malaya, Mauritius, and Belfast. After a brief period in Timber Management, Julian joined the London Stock Exchange, qualifying as a member. He specialised from the beginning in currencies, gold and the "Dollar Premium". At the time, the gold / currency world exploded into action after the floating of the $ and the Pound Sterling. He wrote on gold and the $ premium in magazines, Accountancy and The International Currency Review. Julian moved to South Africa, where he was appointed a Macro economist for the Electricity Supply Commission, guiding currency decisions on the multi-Billion foreign Loan Portfolio, before joining Chase Manhattan the the U.K. Merchant Bank, Hill Samuel, in Johannesburg, specialising in gold. He moved to Capetown, where establishing the Fund Management department of the Board of Executors. Julian returned to the 'Gold World' over two years ago and established "Gold - Authentic Money" and now contributing to "Global Watch - The Gold Forecaster".
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Latest comment posted for this article
If the Greece situation has anything to do with what the gold price is showing, I suspect that when the default happens, there will be a little bit of insignificant wobble,up and down in the gold price! That is another way of saying that there will no e  Read more
S W. - 2/23/2012 at 6:26 PM GMT
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If the Greece situation has anything to do with what the gold price is showing, I suspect that when the default happens, there will be a little bit of insignificant wobble,up and down in the gold price!

That is another way of saying that there will no effect on the value of GOLD :) :)
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The use of gold to bail out of a crisis has been a practice followed by individuals and nations alike. It is a well known fact, that India which figures on the top of the list of countries from where the demand for gold originates, had way back in the 70s mortgaged 65 tons of its gold as security to obtain a loan in dollars from a central bank. Due to the embargo and own currency having limited value outside its borders, Iran is using gold as a barter to purchase its routine and immediate requirements. With dollar losing its sheen as a world currency untill it is replaced, more of such trade transactions delinked from the dollar and transacted in mutually agreed currencies or in gold are likely to become the order. Net net gold may emerge the winner in the evolving monetary system.
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Therefore by default, when Greece defaults the price of Gold will go down?
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Default; price will at first rise even faster; as panic starts to set in. The US dollar is being seen as less of a safe haven than in past. If the crisis then actually spreads and stocks fall, THEN gold will plummet. Whaddo I know, SW? Im just thinking to beat inflation!
RE: "Default; price will at first rise even faster; as panic starts to set in. The US dollar is being seen as less of a safe haven than in past. If the crisis then actually spreads and stocks fall, THEN gold will plummet. Whaddo I know, SW? Im just thinking to beat inflation! "

I think he got that backwards ... a little bit. As European currencies crash, panic starts to set in. What currency will they rush to? The US dollar!! As always! The USD$ will be seen as THE safe haven, subsequently causing the USD$ to rally, and pushing Gold down.
Here's the pattern: USD$ rallies = US stocks down, Gold down. HOWEVER, it's certainly possible that if we entered a phase of HYPERinflation, as people see the purchasing power of their USD$s diminish, those USD$s are inevitably dumped, as people accumulate Gold, thus causing a huge rally in the metals ("Bubble" scenario or "mania", i.e. AU@$5K and AG@$200).
OR ... here's another crazy scenario ... Euro currencies collapse, the USD$ also weakens and the US stock market becomes the safe haven. The prices of US stocks and commodities (i.e., OIL) HYPERinflate, and of course, Gold follows.
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