Europe may have decided that austerity is the only way out of their financial dilemma. That’s ironic since their Keynesian policies helped them get to this brink of disaster. Austerity means a cut back in government programs. That’s the one thing that could work, but it’s not likely to get that austere.
People in France got rid of Nicolas Sarkozy and his austerity and elected Francois Hollande who promises to end austerity. For 40 years, Greece has thought that no one had to work or pay taxes. How has that worked out for them?
Greece can’t pay its debts. The monetary authorities who had been providing funds to Greece can n o longer be sure they will continue to even make the payments which could cause a default process throughout the Eurozone.
It that were to happen, all Greek monetary matters would be restored to the previous currency unit, the drachma. The powers that be will not let that happen.
If there were an Austrian school economist in the group he might say, “Let it unravel, let the debt default and have governments stand back and watch.” Right! Austerity is not much of a threat.
Governments will intervene as they did back in December 2011 when Italian and French banks were staring at default. The European Central Bank infused the necessary liquidity not the banking system to help the markets stave off a bearish downturn.
Europe is like the drug who vows to quit right after the next fix. They’re not stupid! They know the excessive borrowing has destroyed their economy, and they really want to stop cold turkey. But people don’t want to lose their welfare, retirement and other entitlements so they’re starting to riot in the streets for just one more fix.
Fears that Greece or Spain will exit the eurozone have rattled currency and stock markets worldwide. Europe still assumes the dollar is a safe-haven asset, but we have obvious problems of our own.
Politicians here and abroad will again take the easy way out and infuse liquidity. There is already talk of some kind of monetary infusion coming from the next Fed meeting. That could be deflationary in the short term, but eventually we will see price inflation. Remember monetary inflation always leads to price inflation.
The house of cards will fall, and money will move out of the banking systems and into the safe havens of the precious metals. By the end of the year we will see a dramatic rise in the precious metals.
The downside may not be over and it may still be a bumpy road ahead, but gold and silver will return to their highs. As the acceleration develops, silver will move up faster than gold. It’s been weaker than gold for a long time, but silver is a commodity and offers more leverage. In powerful metals bull markets, silver outperforms gold on the upside, just as during declines it falls faster than gold.
By definition gold is never in a bubble. It’s only the messenger recording the sickness of the world financial structure. Generally a bubble in any market happens when so many people get involved that the price is driven beyond reasonable prices.
There is a lot of talk about a gold bubble, but less than one percent of the institutional investment world is in gold and very few of those have taken physical delivery.
People like Warren Buffett, Charlie Munger and Bill Gates characterize gold as an investment, but that’s not right.
Paper currency is created at the whim of central banks. Gold is the world’s oldest currency. It was used as a medium of exchange even before the Roman Empire.
Historically, gold replaced barter by providing a means of exchange to allow widespread trade and commerce. Gold is very hard to produce and almost impossible to counterfeit.
A recent article in Barron’s reports that Simon Mikhailovich of Eidesis Capital sees another 2008-style financial collapse which would make stashing physical gold one of the safest investments around. Mikhailovich warns that the U.S. can’t pay down its massive debts. When one area of the global financial system collapses, the rest of the world will follow suit. He is placing his own funds in gold vaults around the globe. I will do an article later on international gold vaults.