Gold and the Eurozone - what happens when the Euro fails?

With the euro zone getting worse every day gold may offer the best form of wealth protection against a possible global economic meltdown. European investment in gold during this latest period of uncertainty has increased by 135%.

Author: Lawrence Williams
Posted: Thursday , 17 Nov 2011
Mineweb

LONDON -

Despite the apparent switch to Greek and Italian government by supposedly non-partisan technocrats, whatever they may be, the rifts in the Eurozone are increasing rather than improving. How long can it be before the governments of some of the weaker countries decide to pull out for their own citizens' good as possibly providing a more palatable alternative to years of government imposed austerity measures. At least, so the theory goes, should a country have control of its own currency, it can devalue and inflate its way out of many of the problems. It would be a tough path to take, and certainly not one that is without perils of its own, but it could more rapidly restore competitiveness to economies which are subject to Germanic currency strength which their own financial position can not support.

The pips are already squeaking in Greece and in other European nations with the populace decidedly unhappy about austerity measures already being imposed by their governments, and with the prospect of even more stringent ones being introduced. At the moment Greece and Italy are principally in the spotlight, but Spain with its 45% - yes 45% - unemployment rate among the younger element of its workforce, probably next in line, the system has to be close to collapse. Even lofty France is seeing its 10-year bond rate rising fast to well over 3%, but Italy and Greece are knocking on for 6-7% despite the government changes and Spain not far behind. These are levels which are generally seen as unsustainable in terms of debt repayment and would likely eventually lead to default, or even a series of defaults, which would throw the global banking system into meltdown. Deep down all these countries are almost certainly regretting their decisions to join the Euro experiment, although this is not something the politicians are likely to admit.

While Greece could give up the Euro probably without bringing the whole system crashing down, and maybe Portugal too, the Euro could not survive either Italy or Spain pulling out, or both - yet that has to be a realistic possibility as those countries struggle to get to grips with their debt problems. Spain in particular has a huge tourist element in its economy and withdrawal from the Euro, coupled with currency devaluation, could give this sector an enormous boost and the prospect of providing a vast number of new jobs to alleviate the unemployment situation - much as it would in Greece. Nobody is officially talking about such a prospect, but it would be remarkable if this option was not under discussion even at the highest levels of government.

Where does gold go in the face of these continuing problems? The pattern of the gold market is interesting at the moment. Asian demand had been what had been driving the price, but of late it seems to be Europe which is providing the element of price stabilisation and advance as more and more people are pulling funds out of the banking system and into so-called safe havens. The latest demand figures published by the World Gold Council really appear, on the face of things, to bring this out. European investment gold demand in the latest quarter rose by a whopping 135% over the same period a year ago.

While some leeway may now appear in this situation as the new ‘technocratic' leaders in Italy and Greece - and a probable new government in Spain after this coming Sunday's elections - are given a little breathing space, any solutions to bringing matters back under control are still years away and this observer can't, with the best will in the world, see all these countries managing to hold out without at least one of them defaulting for that length of time. This could mean relative weakness in the gold price itself for maybe a week or two, but as the underlying problems come to the fore again we could well see the price surging.

Things will undoubtedly continue to deteriorate before they get any better. The imposition of new austerity measures on people who are already near breaking point will be an enormous test of government by technocrats in Greece and Italy, and the likely new government in Spain. It is difficult to see any goodwill towards the new leaderships in those countries extending much beyond Christmas and then the proverbial could really hit the fan!

The only solution to the problem would seem to be complete Eurozone fiscal, and, ultimately, political, integration under German hegemony and this would likely be far too much for the nations involved to stomach. Indeed Germany itself is more than reluctant to take on the debt problems of what it sees as profligate, and uncontrollable, southern European states.

We, in Europe, are facing perilous times politically and financially, and our problems have largely driven U.S. economic troubles off the radar - yet the danger signs are there too with a major municipality (Jefferson County, Alabama), declaring the country's largest ever municipal bankruptcy last week, and others known to be exploring this seemingly draconian option - how long can it be before some States are forced into doing the same?

Gold has offered some protection over the centuries in times like these and with even Central Banks now looking to increase gold reserves, such protection is spilling over into the mainstream. This doesn't necessarily mean that the gold price will rise inexorably - although this may well happen - but that it may provide a better means of protecting one's wealth better than most other options in such economically perilous times.

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