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Trading Lessons

A Gold and Silver Paper Default in the Wake of an EU Collapse

Commodities / Gold and Silver 2012 Dec 28, 2012 - 07:23 AM GMT

By: Dr_Jeff_Lewis

Commodities

The EU has failed to recapitalize its banking sector, which still remains massively over-leveraged. They have not yet had their "Lehman moment" of truth.
 
Furthermore, governments of the Eurozone adopted the Euro as a common currency in part because by doing so, they could collectively borrow at much lower interest rates than they were used to when they printed their own money.


So, if inflation picks up in the here and now, then that is not going to worry Ben Bernanke because he is going to look beyond that to the future.

Unpredictable Flow and Predicting the Aftermath

Strangely, Bernanke specifically said that he is not going to look at increases in the price of globally traded commodities.That means inflation in oil, food, energy and basic materials, which includes key commodities — like silver — that are essential to each of those sectors.

It seems that if all of the Fed’s recent money printing activities creates an increase in oil prices or food prices, Ben Bernanke is not going to care. Of course, the net effect is going to depreciate the U.S. Dollar, which the world is already selling, so perhaps you should too.

When it comes to guessing which way the hot money will move, inflationary monetary policy offers no real control over where that highly liquid capital flows to.

It's All About Interest Rates

How does the Fed propose reversing inflation? Well, by raising interest rates and then attempting to sell the toxic securities on its balance sheet.

Nevertheless, rising interest rates after the greatest expansion of sovereign debt the world has ever seen will immediately crater a fragile economy already teetering on the edge. Market interest rates would soar and should easily eclipse tax revenue collections.

The Fed obviously knows this, and it will continue to manage perceptions as long as the market consensus is willing to believe or their survival depends on it. The U.S. central bank has already discounted the future by many generations in the hope that markets will follow its increasingly tenuous lead.

Banks’ Market Manipulation Facilitates Charade

Many participants in the market now know that the manipulative actions of central banks have made prices in financial markets essentially meaningless.

By controlling interest rates, the central banks have destroyed interest rates’ important function of providing information about holding intrinsically valuable assets like silver and gold.

In the meantime, the age of sub-$100 silver hangs in the balance between bullish fundamentals and the ability of bullion banks to pull off the modern equivalent of alchemy by turning metal into paper as captured regulators look the other way.

This charade can only last so long.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit www.silver-coin-investor.com

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2012 Dr. Jeff Lewis- 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.

Dr. Jeff Lewis Archive

A Gold and Silver Paper Default in the Wake of an EU Collapse

The EU has failed to recapitalize its banking sector, which still remains massively over-leveraged. They have not yet had their "Lehman moment" of truth.
 
Furthermore, governments of the Eurozone adopted the Euro as a common currency in part because by doing so, they could collectively borrow at much lower interest rates than they were used to when they printed their own money.
 
Now they cannot continue to do this because the beleaguered Eurozone has lost the confidence of the markets and cannot seem to regain it no matter what financial band aids are applied to the situation of excessive sovereign debt. Instead, confidence is largely confined to the currencies of those nations which still maintain a legal monopoly on its creation.

Printing Money Does Not Create Wealth

Everybody knows that money printing will not make a nation wealthy in the long run. Nevertheless, powerful constituencies benefit from money creation in the short term so politicians understand that their re-election depends on not thinking about the absurdity.

It is also often assumed that a wholesale Euro collapse would be U.S. Dollar positive since an overall EU default would cause financial panic, so money would flood back into US Treasuries as a safe haven.

This sentiment tends to weigh against using precious metals as an alternative safe haven — at least in Dollar terms.  Nevertheless, the United States is also overleveraged in terms of its debt.

Precious Metals Likely to Spike on Euro Collapse

If you think that the prices of silver and gold are not going to rise much and that the physical metals are even going to be available immediately after the Euro collapses, you are quite the optimist.

The far more likely pricing scenario would include a demand spike for precious metals reminiscent of January 1980, as people in Europe rush to hard assets to protect their savings.

Fleeing to any perceived safe haven in the wake of the European sovereign debt crisis, liquid money has already flowed quickly away from the various banks, currencies and assets affected peripherally by the debacle.

Physical Gold and Silver Would Become Scarce

Any short term price decline in the precious metals seen during a time of massive economic uncertainty would likely result in physical metal simply disappearing from the market. This would blow up physical premiums relative to paper like the market has ever seen before.

The market got a preview of this in 2008, when silver was pushed from $20 all the way down to $8, despite a notably worsening financial outlook sparked off by the subprime mortgage crisis, falling U.S. real estate prices and the dramatic Lehman bankruptcy. This situation nearly caused a physical shortage panic, which was reflected in physical premiums of over 100 percent at times relative to paper. 

The market’s subsequent response boosted the price of silver from its low of $8.44 in October of 2008 to hit a historic $49.77 high in April of 2011. This dramatic rise in silver’s price was further intensified by the ongoing European Sovereign Debt Crisis that began to make headlines in late 2009.  

Of course, someone might still be willing to sell you a paper forward or futures contract during an EU collapse, but do not count on being able to obtain the physical metal. The declaration of Force Majeure would be almost a certainty, with a cash settlement offered in place of a metal deliverable when the time comes to take possession.

Basically, cashing out now to try and time the market in the middle of a major currency event is definitely a ‘picking up nickels in front of a steamroller’ strategy. It seems better to ‘be right and sit tight’ instead.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit www.silver-coin-investor.com

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2012 Dr. Jeff Lewis- 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.

Dr. Jeff Lewis Archive

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