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What Happens to the Gold World When Greece Exits the Eurozone

Commodities / Gold and Silver 2012 Aug 08, 2012 - 04:37 AM GMT

By: Julian_DW_Phillips

Commodities

Best Financial Markets Analysis ArticleCan it Happen?

It's becoming clearer and clearer that there is a large blind spot in the minds of financial people regarding this probability. Only financial men who have been in the markets for 40+ years understand what can happen. Since then and until 2007, financial men in general have lived in a growing, constructive world that has bred a comfort zone that's still the norm for them. But we've entered a decaying zone, one replete with disappointing financial news and sagging structures that repeatedly fail to meet expectations.


Consequently, there is an inability to really understand what happens in such a climate and how human endeavour can react in both a positive and negative manner. Are you ready, informed and clear on what lies ahead and what you will do? It's growing more apparent by the day that the decay will continue. We say this because like the ice cap in Greenland, what was taken to be normal suddenly disappears and a new paradigm begins.

The difference from today onwards is that the exit of Greece from the Eurozone and Spain asking for a bailout, is so likely to happen, unless some remarkable, very different and unlikely event happens to turn the Eurozone economy around to one of vibrant growth. When that happens expect to see a squadron of pigs flying around the E.C.B. in Brussels in perfect formation.

What Happens to Italy and Spain, etc.?

The unfortunate "P.I.G.S." nations of the Eurozone are extremely vulnerable should Greece exit the Eurozone. The fact that Greece will have left the Eurozone will set a repeatable precedent for others.

If Greece's distress appears not only tolerable but leads to a healthy balance sheet, then the debt-distressed nation of the Eurozone may see that as preferable to a painful and potentially overbearing burden of new debt on their backs with little benefit to show for it. At the very least, these nations will have to convince their people of the details of the benefits of remaining inside the Eurozone. If they can't then these nations may see it better to follow Greece out of the Eurozone.

On the other hand, the fact that Greece has now gone from the Eurozone and its debt perhaps with a value somewhere south of 10% of its original value -- it is now around 30% of that or less -- may frighten the living daylights out of their creditors and bring a halt to any further loans to those nations. This would precipitate their departure from the Eurozone quickly.

Impact on the Eurozone and the Rest of the World

Should nations like Spain and Italy depart from the Eurozone we would see not a nation responsible for only 2% of the GDP of the Eurozone, but ones with a significant contribution [over 20%] to the GDP of the Eurozone. This would immediately force a Eurozone-wide appraisal of the value of the Eurozone itself. Two issues would be highlighted:

  1. The Eurozone accounts for 40% of Germany's exports. These would suffer hurting Germany's export levels.
  2. With the weak nations leaving the Eurozone, the value of the euro would rise tremendously as the overall Eurozone balance of payments would show a much stronger picture. This would hurt the export competitiveness of the Eurozone in international trade. A weak euro was perhaps the greatest benefit to Germany in particular that had to constantly wrestle with a strong Deutschmark before.

On the capital front, nations like France and Germany would find that levels of bad debt (on the books of their banks due by these countries) would cause them to experience further bank crises.

The Issue of Indebtedness Heightens!

Globally, the departure of Greece from the Eurozone could lead to Spain, Portugal and Italy leaving too. Whatever happens, the issue of sovereign indebtedness would take on far more serious proportions. In such a climate and with the global downturn gathering pace, the days of borrowing to live now would be replaced by the arrival of pay later and an extremely painful period of forced austerity. Politicians -- forced by voters where there is a democracy and forced by social unrest where there is not -- would take the only recourse that would gain them votes, which is to allow monetary inflation to be unleashed.

By this time, financial and currency credibility would be at such a low level that the loss of confidence would require actions by governments and central banks to restore confidence by whatever means. Controls to force the use of local currencies through capital controls would certainly be part of this process. Internationally, a crying need would arise for national currencies to be supported by assets tradable internationally that have the respect of the entire world.

After the demise of the Weimar Republic, Germany issued a new currency based on land values, the Rentenmark, which gave the impression that just as the amount of land that was available was limited, so would the amount of currency issued against it would be.

But that is no good outside of the nation. Something would be needed that would be respected and valued internationally, be capable of having its value realized fully outside of the nation, and be portable, i.e. able to leave its owners hands entirely and pass value to its new owner.

Oil could have been a candidate were it not for its constant consumption and the fact that it lies under the control of O.P.E.C., which in turn relies on the U.S. for its security.

The item would have to be completely free of a nation's control. Historically and to this day, there's only one set of items that have fulfilled this role: precious metals, i.e. gold and silver. Both have served as currencies in the past and particularly among the world's bankers gold still does. It fills all the requirements of international money free of national obligations, trusted by all nations even when they receive it from their enemies.

Today's Value of Gold

  • The very fact that the B.I.S. undertook over 500 tonnes of currency/gold swaps two years ago, testifies to it ability to facilitate and support the global monetary system as we know it now.
  • The continuation of the acquisition of gold by emerging nations also testifies to its current and future value as a support for the monetary system.
  • The discussions going on in banking circles on rerating gold from a Tier II asset on bank balance sheets to Tier I (equal to U.S. Treasuries in status) further testifies to its value as bedrock money. This value goes well beyond its market price.

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2012 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

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