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Debt Crisis in Europe and the Dollar Weakens which drives Gold, Silver and Miners Up

Commodities / Gold and Silver 2011 Oct 06, 2011 - 06:32 AM GMT

By: George_Maniere


Best Financial Markets Analysis ArticleIf you want to know future then pay attention to Europe. Pay attention to the policymaker’s decisions regarding the debt. Pay attention to Greece. While many of us have been waiting for ages for Greece to default on its insurmountable debt, it looks like the wait might be over. It's now been realized that Greece isn't going to make its deficit targets that were agreed upon when the country took its loans from the IMF and European Central Bank. While the deficit was originally supposed to be only 7.8% of the nation's GDP, due to slowdowns and poor forecasts, the deficits will now be a whopping 8.5% of GDP. This is putting even more pressure on the already fragile nation, which is even closer to a default as the deficits continue to eat away at the nation's economy.

In the Europe Union there has been little political will to make the hard choices. The gross domestic product (GDP) is going to slow and I would not rule out a recession. This should really get interesting for the Euro policy makers as they attempt to stave off the inevitable.

The lack of money to hold the EU together seems to be the primary concern. The European Financial Stability Fund has approximately 440 billion Euros in committed capital but the members haven’t agreed on future funding requirements. Add to this that the ECB has only10 billion Euros and Portugal, Ireland, Greece and Spain’s debt is somewhere in the neighborhood of 600 Billion Euros and you can see the problem. It only takes 4th grade math to come to the conclusion that the system is severely undercapitalized and some of these countries are supposed to be part of the solution. This is where the rubber meets the road.

Several weeks ago I had a wonderful conversation with a colleague regarding the rise and the fall of the Euro. My friend was very articulate and presented a compelling argument. The article concerned itself with the European Union’s attempt to create a United States of Europe. No more taxation when goods crossed boarders and as a residual effect they would have the strongest currency in the world.

As we spoke, I was struck by the historic precedent of allowing politicians to make decisions in areas that they are not qualified to make. It brought me back to reading some of Martin Armstrong’s writings where he told a story of a major Australian public company that had asked his firm to run its treasury operations assuming the hedging risks. When Mr. Armstrong told this company his fee, they politely refused and instead hired a hot shot young trader in his late 20s. He immediately bought himself a flashing new Porsche as a gift for landing himself a seven figure job. To make a long story short within a week he had lost the company $80 million. Needless to say the board members of the company were not too pleased and they immediately called Mr. Armstrong’s firm back in and with their tail between their legs and meekly agreed to Mr. Armstrong’s original fee. The board had learned, the hard way that they would be best served by hiring a company that knew something about an economic model.

It is an old proverb that a lawyer that acts as his own counsel has a fool for a client. What this firm learned the hard way was that they should not make decisions regarding hedging without some expertise. You wouldn’t hire a lawyer or a dentist to fix your car? While this is a broad generalization the analogy works quite well.

As I have stated the logic of creating the Euro currency to represent 17 nations was at face value a very good idea. Easy trade across borders would stimulate the entire European continent as goods and services would flow and thereby create wealth for all European nations. This was a great idea right? Wrong!

While the consolidating of the European currency was a wonderful idea, it only addressed half the problem. Consolidating the debt of Europe into a single national debt was the first necessary step. I am not saying that that you throw all future debt into one pot. Nor am I saying that you create a national debt on a level with a single interest rate. What I am saying is that you discount the debt of the weak and it must be all accumulated past debt, not debt going forward. Future state debt would become local debt distinguished from federal debt as is the case in the USA. The consolidation of past debt would be at market value and not at some fictitious par value because some politician wants to score some brownie points.

In conclusion, the creation of a single monetary system without creating a single monetary debt can only lead to failure. The failure to have consolidated the Euro debt is far more dangerous than most seem to understand. History is a catalogue of solutions. The problem is that you must first read them!

There seems to be a shortage of places to hide in these perilous economic waters of late. For the last few weeks the dollar has reigned and gold and silver have been relegated to second class status and were summarily sold off. I have written that there is a correlation between a strong dollar and weak commodities and equities. Today we had our reversal. Please see the chart below.

A look at the chart above will show that the dollar has started its pull back and right on cue Gold and silver stepped in to fill the safe haven void. GLD closed up 1.15% at $159.46 and SLV closed up 2% at $29.66. One of my favorite miners Silver Wheaton (SLW) closed up 6.89% at $29.34 and my favorite junior miner US Gold (UXG) closed up 10.92% at $3.86.

In conclusion, the dollar has been very strong in the last few weeks but we knew it couldn’t last. The dollar has been beaten down and for a short bright shining moment it had its day in the sun as it was the best house on the worst block. Compared to the imminent Greek default, the contagion in Europe, the global economic slowdown and the tepid economic conditions here in the US the dollar had its day.

After gold’s parabolic move it is healthy for a stock to pull back before it begins its move up again. My expectation is for gold to rise to a minimum of $2000.00 by the end of the year and if we use the generous historic ratio of gold to silver of 50 to 1 silver will be $50.00 by the year’s end.

Before I take my leave I would be remiss not to mention that I was able to double my position Wednesday in the GDX ETF which is the gold miners ETF. For one moment I had to clean my glasses because the GDX was trading as low as $50.70. Let’s not forget that the GDX was trading in the upper $60.00 range last week and I saw a pullback to this level as a distant memory. This was a gift. With a close of $54.88 yesterday it’s not too late to join the party.

By George Maniere

In 2004, after retiring from a very successful building career, I became determined to learn all I could about the stock market. In 2009, I knew the market was seriously oversold and committed a serious amount of capital to the market. Needless to say things went quite nicely but I always remebered 2 important things. Hubris equals failure and the market can remain illogical longer than you can remain solvent. Please post all comments and questions. Please feel free to email me at I will respond.

© 2011 Copyright George Maniere - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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