In the previous blog, we had both a historical perspective on the effect of a nation’s debt default, and some perspective on the effect if a country defaults.
Now we look at Europe’s difficulties.
The European Debt Crisis
I agree that Europe has troubles. If you travel through the southern European countries, you see lots of economic distress. However, the northern countries such as France, Germany, Austria, etc are very strong. Austria now has the lowest unemployment rate (3%) in the developed world. These countries are very strong economically – I believe stronger than the USA in some cases.
The problem is the weaker debt-ridden southern European countries, who owe about the same pro rata as the USA. Greece is the debtor nation with the highest debt compared to revenues to service their debt. The fear is that Greece will be unable to pay their debts, leading to a cavalcade of other nations also defaulting. As we saw in the last blog, the suspected spreading of the default is not so sure as we are led to believe.
It is this understanding of a prospective spread in debt contagion, and resulting currency volatility, that is the current driver of the belief that the price of gold will rise.
The Current Consensus
The current belief of some onlookers, is that eventually Greece will default, and then either the European Union has to come up with mountains of cash to help their weaker members, or the European Union has to lose members (such as Greece), and other individual countries have to default. Based on European news today, the interest rate being paid on current Greek bonds is 20 1/2%. Compare that to the USA whether interest rates are 2 1/2%.
The market therefore already believes that Greece will default and is pricing that risk factor into the interest rate on borrowings.
What is More Likely to Happen
I think what is most likely to happen, is that Greece will default on their debts, some lenders will take haircuts, Greece will receive new loans from European countries, banks there will take a hit, and the world will go on. However, these things have an unexpected life of their own.
This brings us back to the future price of gold. As currencies rise and fall, gold is affected. Betting on the Euro is risky, as much because there are so many possible outcomes of this debt/currency crisis, as the fact that Greece is teetering on defaulting on their debts. When the Euro was introduced, it was lower than the US dollar, and then rose to be 50% more (properly so I think). I have no idea where it will go now. If you have an ability to answer where and when this is all going to play out, perhaps you feel safe to bet on the Euro or on gold.
The Risk (Gamble) on Buying Gold
Buying precious metals now is a pure gamble. Events in the near future could go any number of ways, depending on political moods in many countries and on many other factors. Which way events turn out, will determine whether gold goes higher in value, or falls in value. Add to this the enormous effect of hedge funds and traders playing the gold futures. Summary – uncertainty in every direction.
To me, that is RISK, a simple gamble on unknown factors. So you buy gold today at your peril, unless you are a professional trader and hedge your bets.
Gold could go either way, and quite dramatically.
Next – the obvious danger signals that everyone is ignoring, and a summary of how to react.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.
