What The Future Of Greece Means For The Future Of Gold


For the past five years, the Eurozone has been perfectly content to kick the Greek can down the road and allow for future generations to handle the stifling debt problem that's been affected the continental economy writ large. With the 2015 election that put the anti-austerity politician Alexis Tsipras into power, the ugly prospect of a messy divorce has gone from a hypothetical to a reality. Tsipras has declared he wants Greece to remain in the Eurozone, but is no longer willing to dance to the tune set by Germany, France, and the Netherlands. That's put the entire EU on pause as the negotiations to either keep Greece in or kick Greece out have had major repercussions on the Euro. What's bad for the Euro (and, for that matter, the dollar, pound, and yen) is excellent for gold. While gold investors may wish that Greece remains on high alert and drags down the Euro indefinitely, there's only one of two ways that the Grexit will go. How does either possibility affect the price of gold?

Austerity: What's In A Name

Those on the other side of the Atlantic have almost certainly heard that Greece has a Parthenon of financial problems, but the details may be beyond most investors' attention spans. The problem with Greece sounds similar to some of the problems with the US: too few jobs for the younger generation put a greater strain on those with fixed income, while too much government spending has received too little tax receipts and created a debt spiral in which Greece owes more money than they make in the span of several years. Where Greece differs from the US, however, lies in currency. Every soul on Earth wants the American dollar since our economic power makes good on our debt; that's why Treasury Bonds sell like hotcakes even when interest rates crawl along. Greece's middling economy represents a problem for them and a headache for the EU. While a mighty economy like Germany can easily bail out Greece (German GDP is about 100 times the debt racked up on the Greek government's credit cards), this creates a domino effect where other ailing European economies ask for bailout measures thanks to their own runaway debt. Italy, Spain, Portugal, and Ireland all carry a far greater debt burden thanks to the Euro, as they are forced to spend more money thanks to a higher-priced currency than they can take in. A nation like France, carrying a debt limit of less than 100% GDP, appears sensible until you realize the economy of France is the sixth largest in the world. Greece, Portugal, and Ireland come in at the mid-40s, sandwiched between Egypt and Kazakhstan. The EU instituted austerity measures on Greece to cut down on trainwreck spending, but recession piled on recession and there's simply not enough cash to pay off Greek debt today, tomorrow, or likely ever. That leaves Greece with the options of leaving the EU and relying on their own currency or severely ratcheting back on social programs, both capable of devastating a fragile economy. Either option has to come soon: Greece will literally run out of currency by summertime.

The Euro Against Gold: A Love-Hate Relationship

Those who invest in gold should make no mistake about it: a Greek exit represents the absolute best case scenario for the precious metal. February negotiations caused gold to rise nearly ten dollars per ounce in a single day when Tsipras abandoned the negotiating table due to high-stakes demands and took his case to the media. The European Central Bank will experience one of the worst currency runs in modern history if Greece leaves, since it will destabilize the Euro and create the possible precedent of future exits. At the moment, nobody wants to invest in the Euro other than currency ETF speculators -- which can be lucrative, but changes at far too fast a rate for a commodities newsletter to offer advice. Conversely, just about everyone in Europe wants to buy into gold to provide a hedge against the near-certainty of Euro inflation. The famous Swiss referendum on gold indicates the degree to which the Swiss government (which isn't even part of the EU) wants to stock up on the precious metal. Even though the referendum failed, the Swiss Central Bank announced it would eliminate the Euro cap that pegged the currency to that of its nearby neighbors, sending the currency in a tailspin and giving gold a shot in the arm. Gold has enjoyed all the hemming and hawing about Greece since the Tsipras election, climbing from below $1200 an ounce to nearly $1300 an ounce after his election, though the plausibility (though not the certainty) of a Greek "staycation" delaying the decision on a modest bailout package has eaten away at the gains since then. Gold futures, conversely, have risen by a small amount (.6%) in the past month on stay-or-go speculation in a market that can't quite make up its mind about what's to come.

Gold: The Big Fat Greek Picture

To what degree do you enjoy gambling? The future of Greece rather resembles the odds for the Superbowl at this point, making conservative investors cringe but allowing for a great deal of fun for those who enjoy elements of risk in their portfolio. Morgan Stanley puts the odds of Greek bailouts at around 50%, noting that the figure is diminishing thanks to Tsipras' stand-off personality and the looming prospect of an EU recession. Harsh currency caps come in at 25%, limiting the Greek government's spending capabilities in the way that Cyprus did last year. Finally, a true Grexit comes in at 25%, resulting in a banking collapse across Europe and a run on gold that will likely be larger than the 2008 recession. How you prefer to hedge your bets can result in a windfall: shorting gold is tempting but longing gold futures may a far better investment since Globex is offering negative double-digit figures for most of 2015 and 2016. A Grexit could push a full gold rebound in 2015, while maintaining the status quo only reflects only a temporary stay of execution if Greek debt cannot be controlled.

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