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Ever wonder what it would
take for Greece or the other debt ridden nations to leave the euro? According
to a UBS report there are no such provisions. It appears that the only way
that a country could leave in a legal way is to negotiate an amendment to
create an opt-out clause. That would likely take a long time and would
require a negotiation with the entire European Union with possible referenda
to be held in some of the countries.
According to the UBS report: “While enduring
the protracted process of negotiation, which may be vetoed by any single
government or electorate, the potential secessionist will experience most or
all of the problems we highlight …(bank runs, sovereign default,
corporate default, and what may be euphemistically termed ‘civil
unrest’).
Leaving abruptly would result in a lengthy bank
holiday and massive lawsuits and require the willingness to simply thumb your
nose in the face of any European court, as contracts of all sorts would have
to be voided. The Greek government would have to “conveniently”
pass a law that would require all Greek businesses to pay back euro contracts
in the “new drachma,” giving cover to their businesses, who
simply could not find the euros to repay.”
After that hurdle one would wonder who outside
Greece would want to take the “new drachma” in exchange for goods
that Greece does not produce on its own?
According to the World Gold Council, gold demand,
which dropped in the second quarter of this year, is expected to strengthen
by the end of 2011 driven by jewelry buying in India and China and recovery
in investment demand. Jewelry buying in India and China, which together
account for 55 percent of global jewelry demand, remains strong in the short
and longer term as the number of wealthy people is expected to grow, "In
the third quarter, we are going to see strong investment numbers, because of
the European crisis, the debt downgrade in the United States and poor
economic figures coming from the United States, which have created a concern
in investors' mind that we may be heading back to another recession,"
WGC Managing Director for Investment Marcus Grubb told Reuters. Economic
worries have fueled investment into gold bars and coins on the western
markets in the third quarter, he said.
Central banks, which have purchased 198 tons of gold
to boost reserves in the first six months of this year, have kept buying in
the third quarter and are expected to continue this trend later in the year.
In addition, it is unlikely that the heavily
indebted European counties will sell their gold reserves because the reserves
are merely a pittance when compared to their mountain of debt – at
least at today’s prices.
To see how this price might change in the future,
let’s move to the technical part of today’s essay. We
will begin with the analysis of the yellow metal (charts courtesy by http://stockcharts.com).
 
In the short-term GLD ETF chart above, we see that
price levels have moved below the rising support line. There has been a
breakdown below the support line based on daily closing prices, but this has
not yet been seen with respect to the support line based on intra-day lows. A
breakdown below this second support line also appears likely however.
In this week’s long term chart for silver, RSI
levels indicate that we are likely seeing the beginning of a bigger downswing
towards the 50–week moving average. This is presently close to the $34
level and at this point appears to be a valid downside target. It appears
most likely at this time that this local bottom is a few weeks away.
In the short-term SLV ETF chart, we see that a
breakdown is visible but it has not yet been confirmed. The situation is
clearly more bearish than it has been for the past month. The breakdown which
is indicated here has also been confirmed by silver’s long-term chart.
If
you consider the signals coming from the market, you will surely notice that
the outlook for both gold and silver is bearish. At the moment, we believe
that the situation might get exacerbated by the action in currencies. We
discussed this on September 13th, in our essay on the U.S. dollar
and gold. To remind just a few points we made:
(…) the
situation in the USD Index is bullish this week and quite the opposite is
true for the Euro Index. (…)
The influence of these currencies is likely to be very visible throughout the
precious metals sector. It appears that the key signal to watch for this week
is whether the USD Index can retain its upside potential. This would greatly
increase the probability of lower precious metals’ prices in the weeks
ahead.
This confirms the bearish signals from the precious
metals sector itself.
Summing up, the situation in gold is bearish for the short term
and is certainly more bearish than it appeared at the beginning of the week.
Such a sentiment is now confirmed by the gold market. The current situation
for silver is very much the same as it is for gold, which is quite bearish
for the short term. Additional confirmation comes from the recent action in
both the Euro Index and in the U.S. Dollar Index.
Przemyslaw
Radomski
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