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What Will Happen to Greece and Gold?

Commodities / Gold and Silver 2012 May 16, 2012 - 10:26 AM GMT

By: Julian_DW_Phillips


Best Financial Markets Analysis ArticleWhat Greek Elections Now Mean

Greece cannot form a government so expect elections within a month. We have come to the point where the bad news is out -the markets are telling us that Greece will likely leave the Eurozone and possibly the euro as their 10-year debt continues to trade at 27%. They may not pay out €436 million to creditors and keep it, fearing they will not get the next bailout tranche. Reneging on the obligation also would constitute a default triggering derivatives contracts and clauses requiring the settlement of other un-swapped bonds. Meantime the country has no government to make the choice. The country may run out of money by early July. The standoff has reignited concern that Greece will renege on pledges to cut spending as required by the terms of its two bailouts negotiated since May 2010

This blazes the trail for Spain to follow by asking, first, for a bailout. Portugal, Ireland, and potentially Italy are looking more and more each day like Greece. We're now looking at the worst possible scene.

Whether this will happen or not is not the point for investors in gold and silver. The fact that markets are aware of this situation and are, in fact, discounting it is much more pertinent. If the euro doesn't collapse and if these nations leave the Eurozone, then do not expect to see the Eurozone fall apart but to be much stronger having jettisoned the weak members. This would strengthen the euro enormously and send it back up towards the €1: $1.40 area. We do not think this is being discounted yet. The old rule that when the news is at its worst is the historic turning point of markets. With gold and silver moving with the euro, traders may keep the precious metals moving with the euro as it rises. This is where we are now.

Consequences in Greece

We have been witnessing a massive flight of capital out of Greece, out of the banks, i.e. Soc. Gen., that are large holders of Greek debt and even Greek money leaving to hide in the stronger member's banks in the Eurozone. Any exit of Greece from the Eurozone would have to see their banks re-capitalized. Under the Maastricht Treaty, which formed the Eurozone, any member state can impose Exchange Controls for a short period of time while that country remains in the Eurozone. In Greece, that could happen just to close the exits and prevent a further run on the banks.

If the government decides to switch back to the Drachma, then expect to see the steps Argentina took when they switched from the U.S. dollar back to the Peso. These would automatically lead to the changing of all money, deposits and all, to Drachmas.

We would then envisage not just a two-tier currency -one for trade and one for capital. Expect the "Commercial Drachma" to trade at around 50% of the value of the euro and the "Financial' Drachma" at a 30% discount to that. While this would stall imports, import replacement would spring to life inside Greece and a boom would begin. Tourism would likely roar as cheap holidays drew in huge volumes of tourists.

The central bank would impose draconian exchange controls grabbing all the foreign funds they could. Banks would be eager to return to Greece as they would see a sort of "scheme of arrangement" where they could bring in loans through the "Financial' Drachma" and, provided the loans were given a 10-yr plus life, would be allowed to repay them through the "Commercial' Drachma" giving them not just huge capital profits but a boost in their interest earnings over the life of the loan. The resulting low cost of labor and the financial incentives to manufacturers could see manufacturers move production there too. Such a positive outcome for nations that follow this path is normal.

Yes, many in Greece would struggle terribly; however, the core of their financial system would continue, and maybe even thrive. (Note: Since 1971 the author has experience with Exchange Controls and would be happy to consult on this subject.)

The success or failure of a Greek exit from the Eurozone and probably the euro would depend entirely on how the financial side of the departure was handled.

It's well known that Greeks love gold, and rightly so, especially when one considers what lies ahead for them. But they have been buying and preparing for this eventuality for the last two years.

Consequences outside Greece

The Eurozone banking system would suffer tremendous losses and would initially suffer the blows of lost confidence. Again, we're seeing this now. The overall Eurozone has entered a mild recession that could get worse, but the same could apply to the U.S., travelling some distance behind, in a financial structure more capable of weathering such storms.

The fiscal and political unity in the States is responsible for the current strength of the dollar; however, should the global debt situation worsen and there is a maturing of other major, U.S. problems, then the U.S. will follow Europe; before this happens, however, the emerging world will need to reach the point where it equals the financial world of the developed side of the globe. The Yuan going global would start the process.

We would have to see a rapid expansion of the money supply in Europe as toxic national debt values shrank and needed a fresh injection of capital to replace lost value. We're on the brink of another chapter of this right now. While this would undermine confidence in the euro and the dollar, the reality that these currencies are the only available means of exchange will continue to ensure their use and control over the developed world.

But the loss of confidence process would result in investors seeking to preserve the value of their wealth in gold and silver bullion even more than we have seen in the last few years. Many times we've discussed just how gold would be used to reinforce the current currency system and how that process would become reality. More importantly, the institutionalization of gold in an active role in the monetary system would become a reality.

This would start in Europe, but the U.S. would dovetail into the developments as a cautionary reinforcing of its own monetary system too.

It may be that the public discussion over where Germany's gold is held will lead to public pressure on Germany to repatriate it. If this happens, expect other nations in the develop0ed world to follow over time, accompanied by the recognition of gold's importance in the reserves of a nation. This will highlight the desirability of gold in reserves to other nations outside the developed world and an acceleration of the demand for gold by the world's central banks.

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

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.

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