The European problem is one of the biggest threats to the health and strength of the American financial system and one of the best reasons investors are buying gold now. Posted by James Randolph on February 08, 2012
Buying Gold Before A Greek Default
February 8, 2012 – The European problem is one of the biggest threats to the health and strength of the American financial system and one of the best reasons investors are buying gold now. While many European nations have trouble in the form of bad debt on their balance sheets, Greece is further along in the progression of the disease than Portugal, Italy, Ireland, Spain, and the others. Greece is the position that it will have to be spending more money to service its debt in interest payments than it pays on principle so that it can never, mathematically, get out of debt. This is dragging down the European Union like a millstone around the neck of a man thrown off a ship at sea.
Many contingency plans have been made and speculated upon, such as Northern Europe splitting away and possibly pulling away from the Euro, economically strong nations such as Germany pulling out of the Euro and the Union, as well as less believable possibilities that have made the wire. Both China and Brazil, when asked, sent Europe packing, effectively saying, “Take care of your own problems.” Financing from within Europe is incredibly unpopular politically, however. Chancellor Angela Merkel of Germany, particularly, has suffered to the point where her own reelection was questionable at one point. The bottom line is that Germany, the most fiscally sound and economically stable European country with a strong manufacturing base, is the last country that should be asked for a bailout considering the reparations after World War I and World War II.
With each piece of bad news coming out of Europe, the price of gold surges and demand increases as safe-haven and smart buying take over the gold market. When it comes down to the money, it seems the political unity of Europe is far more tenuous than idealists wanted to believe when they set up the political bloc in the 1990’s and instituted the Euro. Greece is the European Union’s Achilles’ heel right now because a default in the Mediterranean country could bring down other European economies. This possibility became more dangerously close to reality last week when negotiations with bondholders fell apart, the latest in a long series of failed negotiations around the Grecian balance sheet. The negotiations would have allowed Greece to borrow from government creditors at a reduced rate, but now whether the country defaults is in the hands of private creditors.
As hedge fund manager Kyle Bass has said, “I’ve never seen an orderly default,” and the possibility of an unstructured Greek default risking the economies of stronger European countries in a domino-like chain reaction must be accounted for in the psychology of the markets. The European problem is a fundamental driver of the gold market now and will be for some time to come.
Any default in Europe will immediately affect American markets in a drastic fashion. It was exposure to European sovereign debt that brought down a centuries-old American banking institution with a former Governor for a CEO. John Corzine may have spoken before Congress and that missing $1.2 billion in customer funds may have been found, though it’s still not accessible, but the lessons of MF Global seem to have faded from the public consciousness. Nobody even knew the bank had European debt on its balance sheet. And reports surfaced in the wake of that disaster that all major U.S. banks as a policy have been investing in Europe. Jamie Dimon, CEO of JP Morgan, told an Italian Newspaper that his bank stands to lose $5 billion in a European default. It’s a chain reaction that, once started, cannot be stopped.
Owning gold in this kind of climate is just the logical and sensible thing to do. While the wave to gold as a safe haven asset following the MF Global collapse should serve as an example of what gold will do in the event of any major failure in Europe, it also just makes common sense to be preserving your wealth, protecting yourself and your family, and hedging the mathematically impossible problems in Greece’s balance by buying gold, the only asset that will retain its value and even appreciate when the coming problems from Europe hit American shores.
Senior Staff Writer – Certified Gold Exchange