Grexit and gold: The first 46 hours

With more than 50% of investors surveyed by Bloomberg News predicting an exit of a euro member this year the wire service on Tuesday reported on how a Greek exit from the Eurozone may play out based on synthesized scenarios from 21 economists, analysts and academics.

The wargaming suggests the country may have only 46 hours – Friday’s close in the New York to Monday’s market open in New Zealand – to pull off any sort of non-chaotic departure.

Over the two days, leaders would have to calm civil unrest while managing a potential sovereign default, planning a new currency, recapitalizing the banks, stemming the outflow of capital and seeking a way to pay bills once the bailout lifeline is cut.

The risk is that the task would overwhelm any new government in a country that has had to be rescued twice since 2010 because it couldn’t manage its public finances.

What makes a Grexit music to the ears of gold bugs is what central banks will have to do next according to this euro-exit scenario:

To stem any dollar shortages as a result of market panic, [apart from the ECB] other central banks including the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank probably would stand ready with swap lines augmented after the bankruptcy of Lehman Brothers Holdings Inc. in 2008.

If the world’s central banks join hands to flood the market with cheap money it will be a massive boon for gold. Gold should recapture its allure as a storer of wealth and an inflation hedge. And it would hurt the dollar, boosting the metal's price.

It is worth remembering that before the Fed kicked off  its easing measures (QE1, QE2 and Twist) on 16 December 2008 which  pumped almost $3 trillion into the market an ounce of gold was changing hands for $837.

Continue reading "War-Gaming Greek Euro Exit Highlights Hazards In 46-Hour Weekend" at Bloomberg here >>

Read more about QE in the EU, Grexit and Operation Twist and the effect on the gold price here >>

Image is an engraving of Greek philosopher Socrates drinking hemlock after being sentenced to die for corrupting the youth of Athens in 399 BC.