by Louis Golino for CoinWeek
The issue of Greece’s possible exit from the euro and its impact on the European and world economies is weighing heavily on the minds of political leaders and financial experts. As the prospects for that event loom ever larger, markets are in greater turmoil than probably at any time since the collapse of Lehman Brothers in September 2008.
But unlike Lehman, a crisis which built up over time and then peaked over one fateful weekend in mid-September 2008, the Greek crisis has dragged on for years. Some analysts call in “Lehman in slow motion.”
And as happened in late 2008, but not yet to the same extent, there is hardly any place to seek refuge from declining markets. Equity markets are declining day after day, and precious metals experienced a sharp decline last over the last couple weeks and then rebounded at the end of last week. Meanwhile, many people with financial assets are seeking to protect them from all this volatility by flocking to the U.S. dollar and Treasury bonds.
The argument that gold has lost its status as a safe haven because it provides no refuge in the current crisis keeps resurfacing as if it were something new despite the fact that it has been apparent since last year that gold is no longer trading like it used to. It now trades mainly as a function of global monetary circumstances because gold is an alternative currency. I discussed the new relationship between gold and other asset classes last fall, when I called it a new normal .
Basically, the worse things get in Greece, the lower the euro goes and the worse gold performs. And when things start to look better in Europe, even temporarily, gold starts to do better, as money moves out of the dollar and back into risk assets. Finally, as economic activity looks more likely to pick up, gold looks more attractive because inflation is usually a by-product of significant economic growth.
Anti-gold types like economist Nouriel Roubini, who is one of the few economists who predicted the 2008 economic collapse, have been talking about how gold bugs are hiding in their caves. Jon Nadler, who writes for Kitco , said that “the gold market has entered the cave of the bear.”
Warren Buffet keeps rehashing his arguments against the metal, which have been discussed before in this column , and one of his associates, Charlie Munger went so far as to say that civilized people do not invest in gold.
And speaking at the second annual CPM Group precious metal mining investment conference, Dennis Gartman advised against buying gold because, as he put it bluntly, "it sucks." He suggested sticking with the dollar, which he thinks will remain the world’s reserve currency for the next 150 years because the U.S. will remain the dominant military power.
Meanwhile, there still seem to be quite a few barbarians out there who don’t think gold sucks and who are doing more than just admiring the shiny metal, as Mr. Buffett suggest gold bugs do.
Jewelry and technology sector demand for gold is down, but investment demand is up, especially in China, where it rose by a record 10% during the first quarter of the year, according to the World Gold Council .
And in Germany, which several years ago sent its gold reserves to the U.S. for storage at the New York Federal Reserve Bank, there are growing calls to make sure the gold is actually where it is supposed to be.
In addition, George Soros and John Paulson remain bullish on the yellow metal. According to media reports, Soros and Paulson both increased their stakes in the SPDR gold fund.
In other gold news, a Japanese pension fund has decided to invest its assets in gold. And perhaps most importantly, gold proponents point out that the more widespread bearish sentiment becomes, the more bullish they feel since the crowd is almost always wrong.
Gold prices reached a low for the year on May 16, declining to levels last seen in December, before rebounding the next day. Silver reached a low last week of just under $27.00 but by the end of the week was trading at close to $29.00.
On May 17 gold prices rebounded by the largest dollar amount ($40) in four months. There were several reasons for the sharp rebound in gold and other precious metals. They were oversold over the past couple weeks, and prices declined so much that buyers came out.
Analysts believe the rebound was also made in anticipation of further monetary easing by the European Central Bank in light of the rapidly deteriorating financial situation in the EU. A day after the ECB said it planned no further such action in the short-term, the IMF called on the ECB to do more to shore up the financial system.
The Greek situation is clearly a key factor shaping gold prices in the short run, and that will remain the case for some time.
There are reports of large numbers of people withdrawing their money from Greek banks, though technically it is not yet a bank run, and other signs continue to emerge of a society on the brink of collapse, as rumors swirl that the government may not be able to pay salaries for police officers and other public sector employees. New elections are to be held on June 17 to try again to form a new government, and EU government leaders and officials say that the June 17 vote should become a referendum on Greece’s membership in the euro.
Greek voters on May 6 rejected the EU’s austerity program, but most Greeks, government officials and citizens alike, still want to remain inside the euro zone for fear of what life on the outside would be like. They know a new Greek drachma would be essentially worthless.
At the same time, EU officials are getting more and more worried about a possible Greek exit from the euro because of its unknown impact on European economies and financial markets and the precedent it could set for other euro members, although none of them has expressed a desire to leave.
Matthew Lynn of Market Watch says that there is simply no way to know in advance whether the contagion from a Greek exit can be contained rather than spreading to other countries. As he explains, the EU can continue trying to build financial fire walls, the IMF can remain on stand-by ready to inject liquidity, and other reassuring steps can be taken.
But because it has never been tried before, there is no way to know in advance how a “Grexit” (Greek exit) would play out. There is a very real risk that money would flow out of any EU country seen at risk from Ireland to Portugal, Spain, and Italy. And the list could grow. That would raise the prospects of an EU-wide bank run, and a global recession or even depression, as the impact makes its way through the global financial system.
Already last week Spanish banks came under severe pressure because of withdrawals of customer accounts in anticipation of a Greek exit from the euro.
Given those incredibly high stakes, Mr. Lynn believes that in the end Germany and the EU will decide on a huge bailout of Greece, a kind of Marshall Plan for the troubled Mediterranean country that may only buy time in the end. But at least it would give the country some breathing space. Besides, as Mr. Lynn points out, so far EU bail-out funds have not reached the Greek people. They have only gone to bankers.
Louis Golino is a coin collector and numismatic writer, whose articles on coins have appeared in Coin World, Numismatic News, and a number of different coin web sites. His column for CoinWeek, “The Coin Analyst,” covers U.S. and world coins and precious metals. He collects U.S. and European coins and is a member of the ANA, PCGS, NGC, and CAC. He has also worked for the U.S. Library of Congress and has been a syndicated columnist and news analyst on international affairs for a wide variety of newspapers and web sites.