Greece: High Flying Drachma
Axel Merk, Portfolio Manager, Merk Funds
November 22, 2011
The worst-case scenario for Greece, should it be unable to secure further bailouts, might be that it would have to live within its means. Presently, spending only the money coming in is considered unbearably brutal. If Greece could only leave the euro, it could install its own printing press, inflating its sorrows away. Any economist will object: it’s complicated. But it isn’t: Greece could introduce a high-flying New Drachma, quite literally.
VIDEO AT LINK:
First, please note that any country may default on its debt. The trouble is that the day after a default it might be difficult or impossible to obtain a loan at palatable terms. As such, any country considering a default must conduct a risk / benefit analysis. A country that has a primary deficit, i.e. a budget deficit before paying interest expenses, faces the challenge that such deficit would be eliminated overnight (because the deficit could no longer be funded), causing a massive shock to the economy as government spending would come to an abrupt holt. To mitigate such a shock, it is usually the lesser evil to beg for leniency from creditors, in return for austerity measures. It is in Greece’s interest to promise the stars to get yet another loan. In contrast, once a primary surplus has been achieved, Greece may well find a default attractive to cut its overall debt burden; the shock from being shunned from the credit markets would then mostly be a shock to the creditors.
It’s because of these dynamics that countries tend to default only after an agonizing period trying to cut expenditures. Some succeed: look at Ireland. The country appears to be regaining the confidence of the markets. However, political realities may make it difficult for Greece to ever get on a sustainable fiscal path.
Graceland Updates 4am-7am
Nov 22, 2011
1. Today is options expiry day on the comex. Click this options information link now. A substantial rally in gold is likely, right here, right now, and may have already started from yesterday’s lows.
2. Now, click this GDX comparison chart. This chart compares the performance of GDX against the Dow. Yesterday was a particularly bad day for the Dow, as concerns intensified about the European quagmire.
3. GDX put on quite an interesting performance yesterday, and ended trading yesterday almost at the high of the day! After trading as low as $54.92, it ended the day at $56.20, just off the $56.21 high.
4. Given that the Dow closed down almost 250 points, and closed in the lower part of its range for the day, that’s a powerful recovery for GDX.
MAKE OR BREAK
BIG PICTURE – The global economy is slowing down, most of Europe is in recession and the US is also on the verge of a contraction. Nonetheless, the ‘risk on’ trade has raged over the past month and somehow, the market seems to be oblivious to the real economy.
There can be no doubt that the past month has been difficult for us, not least because the surge in risk appetite has hurt our defensive posture (modest ‘short’ exposure with a large dose of US Dollar cash). However, despite the recent rally in ‘risk’, we are not convinced about the sustainability of this advance.
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Weekly Market Update Excerpt
Nov. 18, 2011
US Dollar Analysis
- When comparing fiat currencies, you probably hear a lot about the dollar being the “best of a bad lot”, but the dollar is more likely in early stages of losing its coveted world reserve currency status.
- To be a successful investor, you do need high levels cash to operate, but that doesn’t change the fact that the dollar is in serious fundamental trouble. Gold should be your personal reserve currency. Take note of the price action on the above chart. Compared to gold and the euro, the dollar is the worst performer.
- The decline in the dollar over the last few years is creating economic challenges for the citizens of America. The “misery index” is on the rise. This index is the unemployment rate added to the inflation rate. The growing misery is caused by rising debt and currency devaluation. Go to www.miseryindex.us to view monthly statistics that extend back to 1948.
- Note the recent commentary from one of the world’s leading investors, Jim Rogers, “We have shortages of everything from oil to food and on top of that we have governments printing more money. Put the two together and you have some serious inflation coming down the road.” Jim Rogers, circa 2006-2011.
- While pinpointing an exact date for a lot of the quotations from Jim Rogers is difficult, I would like to point out that the bulk of the most recent misery index number is based on the official unemployment number. Should inflation start to rise, the misery index could easily rise above the highs hit in the 1970s.
- An unsuspecting public is getting clobbered with both inflation and deflation. Homes are devaluing while fuel and retail food prices are rising, which means rising misery levels.
HUI Bull Seasonals 4
After updating my gold-seasonality research last week, I heard from traders wondering how it affects gold stocks. Since the price of gold is their primary driver, gold seasonality naturally has a major impact on gold-stock price levels. This is readily apparent in the seasonality of the HUI, the flagship gold-stock index. As you’d expect, this sector mirrors and amplifies the seasonal swings in the metal it mines.
Gold’s seasonality is demand-driven. Throughout much of the calendar year, various income-cycle and cultural factors around the world drive outsized spikes in gold demand. After discussing these in depth in last week’s essay on gold bull seasonals, there’s no need to rehash them here. But while gold’s demand varies radically over a calendar year, its mined supply is almost perfectly inelastic.
Nov 13, 2011
Platinum: The “Cheapest” Precious Metal…
With the ongoing crises in the Western World, precious metals are regaining their role as “currency”, as they cannot be printed out of thin air unlike fiat money.
The Gold Standard
Issue #11 ● 15 November 2011
The Gold Standard
The journal of The Gold Standard Institute
Editor Philip Barton
Regular contributors Rudy Fritsch
Occasional contributors Publius
The Gold Standard Institute
The purpose of the Institute is to promote an unadulterated Gold Standard
Patron Professor Antal E. Fekete
President Philip Barton
President – Europe Thomas Bachheimer
Editor-in-Chief Rudy Fritsch
Senior Research Fellow Sandeep Jaitly
Annual Member €75 per year
Lifetime Member €2,500
Gold Member €25,000
Gold Knight €250,000
Editorial ........................................................................... 1
News ................................................................................. 2
False Belief #10: Professor Fekete’s Work Is Futile 3
Report from Utah II ...................................................... 5
Infinite Money Part 2 – The Quality of Gold ........... 7
The Golden Triangle; Economic Nirvana? ................ 7
Is the Real Bills Doctrine Inherently Inflationary ... 10
Debit Card Gold Dinar Payment System ................. 11
I will be heading over to Auckland, New Zealand toward the end of the month for Louis Boulanger’s Gold Seminar. I look forward to catching up with some of you there. It is a truly beautiful and unique part of the world… consider adding on another few days to go exploring. It is a great event with great speakers. Book now.
Let the Markets Decide
At The Gold Standard Institute we do not seek to enforce the use of gold as money. We believe that only a voluntary market should determine the money that is in use and not as a concept that is binding on all. In each and every exchange between two or more people there should be the same choice of the exchange mechanism as there exists in the choosing of the good. How can a market ever be considered free if the one constant in all transactions is enforced?
That said, history and logic strongly supports the idea that the vast majority of people will choose gold and silver. It is with that in mind that we seek to educate people as to how a Gold Standard can be implemented in such a way that it will work.
An absolutely vital component of a workable Gold Standard is Real Bills… that is why the market originally introduced them. The free market does not indulge in over-complexity. The Real Bills, once understood are not only of undeniable benefit, they are essential to the success of the Gold Standard. In this issue of The Gold Standard, Rudy Fritsch further explains Real Bills in ‘The Golden Triangle’. We also have another article in the ongoing series on Real Bills by Thomas Allen.
Graceland Updates 4am-7am
Nov 15, 2011
1. Gold at $1800 was a touch “up there”, but in the bigger picture, the weekly chart is ultra-bullish. Click this gold liquidity flows table now. The commercials (banks) have added both longs and shorts, as of the Tuesday, November 8th cut-off date for the latest COT report.
2. Their action of adding some longs suggests they expected a short term move higher, which happened.
3. The heavy add of short positions suggests they understand that gold has ran about $270 higher, from $1530 to about $1805. It’s definitely not a time to be adding long positions for anything but a flip trade.
Gold Bull Seasonals 6
Gold has just entered its strongest time of the year, embarking on a major seasonal rally. Naturally this is very bullish for not only this metal, but the companies that wrest it from the bowels of the Earth. Gold’s well-established seasonality is important for speculators and investors to understand, as it offers many great insights to help fine-tune the timing of precious-metals-related trades.
Seasonality is somewhat counterintuitive for gold. For a commodity like wheat that can only be grown and harvested in certain times of the year, seasonality is perfectly logical. Wheat supply fluctuates greatly based on celestial mechanics. But gold? Unlike the grown commodities, this metal is mined globally at a remarkably-steady pace year-round, regardless of sunlight, temperature, or weather.
But of course supply is only half of the price equation, equally if not more important is demand. And for a variety of interesting income-cycle and cultural reasons, gold demand ramps up dramatically at certain times in the calendar year. Since mined supply is essentially fixed and can’t swell to meet these big demand surges, gold’s price is quickly bid higher. Gold’s seasonality is demand-driven.
3 Drivers, 2 Months, 1 Gold Rally?
By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors
Federal Reserve Chairman Ben Bernanke announced last week that the Federal funds rate will stay near zero for now. He reasoned that the “low rates of resource utilization and a subdued outlook for inflation over the medium run” would likely “warrant exceptionally low levels for the federal funds rate at least through mid-2013.”
This will likely translate to the real interest rate (which is the rate of interest an investor can receive on a U.S. Treasury bill after allowing for inflation) remaining negative for at least another year and a half.
For gold investors, a low-to-negative interest rate has been associated with a powerful historical trend. Going back four decades, gold has experienced positive higher year-over-year returns whenever the real interest rate tipped below 2 percent. And the lower the rates drop, the stronger gold tends to perform.