Central banks will be forced to flood the global monetary system with paper money
Amid rioting in the streets of Athens, the Greek parliament finally approved the austerity package required in order to secure the EUR 130 billion second bailout from EU/IMF. Out of 300 lawmakers, a total of 199 voted in favour of the bill and 74 against. However, Greece still has to present the full details of the package on Wednesday at an extraordinary meeting of Eurozone finance ministers who must decide whether to approve the second aid package for Greece. The EU Economic and Monetary Affairs Commissioner Rehn said he's "confident" that Greece has done enough to ensure it receives the bailout.
For the past two years, Greece has quarrelled with the Eurozone and the International Monetary Fund (IMF) about its’ financial dilemma and its apparent "rescue." Austerity measures have been agreed to, aid has been paid and private creditors have been forced to accept "voluntary" debt haircuts. Despite all this, Greece is in even worse shape today than it was then. Its economy is shrinking, the debt ratio is rising and the country and its banks have been cut off from capital markets.
Essentially, Greece is bankrupt and needs another bailout package to avoid a default. For weeks now, the Greek government has been negotiating with private creditors and the troika comprised of the IMF, European Union and European Central Bank (ECB) over a second bailout package. But, it is already clear that this aid package will not save the country and will only delay the inevitable—an insolvency.
Private bondholders who met in Paris discussed accepting an average coupon of as low as 3.6% on new 30-year bonds in a proposed debt swap. Such an agreement would slice 100 billion euros off more than 200 billion euros of privately-held debt and a formal offer must be made by Feb. 13 to allow all procedures to be completed before the March 20 bond comes due.
According to an article published by Reuters on Monday, Moody’s rating agency warned it may cut the triple-A ratings of France, the United Kingdom and Austria, and it downgraded six other European nations including Italy, Spain and Portugal, citing growing risks from Europe's debt crisis.
Moody's, which said late last year it was reconsidering its European ratings, cut by one notch the ratings of Italy, Portugal, Slovakia, Slovenia and Malta and downgraded Spain by two notches.
Moody's said the scope of the downgrades was limited due to "the European authorities' commitment to preserving the monetary union and implementing whatever reforms are needed to restore market confidence."
The announcement came a day after Greece's parliament approved a deep new round of budget cuts in the hope of securing new bailout funds and avoiding a chaotic default in March.
The rating outlooks of the nine countries affected by Moody's action was set to negative, "given the continuing uncertainty over financing conditions over the next few quarters and its corresponding impact on creditworthiness," Moody's said.
Moody's move on Monday follows one by Standard & Poor's last month, when France and Austria lost their triple-A status, while Italy, Spain, Portugal, Cyprus, Malta, Slovakia and Slovenia were downgraded. S&P also cut the EFSF by one notch.
Also in January, rating agency Fitch downgraded the sovereign credit ratings of Belgium, Cyprus, Italy, Slovenia and Spain, indicating there was a 1-in-2 chance of further cuts in the next two years.
Recently, Standard & Poor's (S&P) downgraded 34 of Italy's 37 banks, including UniCredit. However, the news went practically unnoticed as it was overshadowed by the problems in Greece.
As I have stated countless of times the European crisis is far from over. And, no amounts of bailouts or monetary stimulus will resolve the impending disaster. The entire European banking system continues to deteriorate month by month. Not only are most countries in this region bankrupt, so are many of their banks and financial institutions. But, to compound this global problem the real financial problems of the US are being ignored for the moment as Greece takes centre stage.
It is difficult to predict when the endgame will arrive, but when it happens and in order to avoid a series of defaults central banks will flood the system with money causing the value of global currencies to become worthless while pushing inflation sky high.
After some three years of injecting trillions into bank bailouts and stimulus, the US and most Western countries still have stagnant economic growth with high unemployment. The banks that have received “cheap” money have merely used the funds mostly for proprietary transactions. In the meantime, the central banks of the US, EU, UK and Japan have massively expanded balance sheets. Instead of using funds to stimulate real economic growth all the central banks have done is use their funding to save many financial institutions from collapsing, while creating “false” asset prices, giving the impression that their actions are having a positive effect on economic growth.
Yet, despite the relative ineffectiveness of their monetary policies, these central banks continue with the same strategy, but merely find new names for their actions. While the major financial institutions will benefit in the short-term, these policies will cause a dislocation in the global currency markets which will lead to an intensification of the current currency war. We will also see continued levels of high employment in the major Western economies, further capital controls, and more social unrest.
Unless you believe that what I have written is merely a figment of my imagination, and that I have made up these scenarios, then it is essential to take precautionary measures to protect some of your wealth. And, one of the best ways to do this is to own some physical gold in the form of gold bullion coins and bars.
The most popular gold bullion coins include Krugerrands, US Gold Eagles, the Canadian Maple Leaf, the Chinese Panda, Mexican Gold Pesos, and the Australian Kangaroo etc.
Bullion bars come in many sizes. Gold bullion bars can weigh anything from a few grams upwards. Bars from 1 kg and 100 oz (~3kg) bars are sometimes accepted by participants in the professional bullion markets in Zurich and New York – though under strict controls to ensure bullion integrity. In London the market deals in the London Good Delivery (LGD) gold bullion bar. These gold bars are what most people think of as bullion.
This London Good Delivery bar of bullion weighs 400 troy ounces – about 12.4 kilograms – and is about eleven inches long. It is stamped on the top (the bigger face) with the manufacturer's name, the weight, and the assayed purity.
In South Africa, individuals are not allowed to own these 400 oz bars. In fact in a law that defies any sense of logic, the largest size gold bullion bar individuals are allowed to own is 100 grams. So, even if an investor wants to own say a kilo of gold, the investor cannot own an individual bar weighing one kilo, but can buy ten 100 gram bars or a medallion weighing one kilo.
No matter what form of gold bullion you prefer, it is important to own some physical gold and not to confuse gold bullion items with limited edition medallions that have no investor value whatsoever.
Gold prices have built solid support above the $1700 an ounce level during the last two weeks. I believe that it will continue to trade above this level, and prices will soon re-test the next key resistance level of $1750 per ounce.
ABOUT THE AUTHOR
David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.