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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!
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