Black Storm Cloud Looms Over Greece And The Global Horizon
The clock is ticking toward a Greek debt default which could jettison the country from the euro-single currency bloc.
A “Grexit” or Greek exit from the euro zone could catapult the region and the globe back into financial crisis and political turmoil. A Greek exit would have far reaching implications not only for contagion within the euro zone, but would also raise concerns about the viability of paper currencies, and the subsequent shifting global power balance between the East and West.
Gold, a long-revered flight-to-quality and alternative currency investment, is poised to shoot higher as the potential crisis unfolds in the days and weeks ahead, and investors clamor to the safety of the yellow metal.
The cash-strapped Athens government is slated to run out of money on April 20 and is asking its creditors for emergency funding help. Greece owes money to a number of creditors, including the International Monetary Fund, the European Central Bank (ECB) and the European Commission in the wake of two bailouts back in 2010 and 2012.
The international creditors are demanding additional changes to Greece’s pension system in order to help reduce debt levels and spur economic growth. In a standoff, the left-wing Greek officials refuse to slash payouts to pensioners saying its citizens have already seen enough pain. The tough stance has led to rumors that Greece is readying for a debt default, which could see the country exit from the euro zone.
Worst case scenario? A Greek exit from the euro zone could trigger a massive full scale breakup of the single monetary union and trigger another global financial crisis on a scale of massive proportions far deeper than the 2008-2009 Great Recession. ECB president Mario Draghi admitted in weekend meetings in Washington D.C. that a Greek debt default would lead Europe into “uncharted waters.” Other vulnerable economies in the currency union could begin to fall like dominos.
Who is vulnerable next? Even if a full-scale break-up of the euro-zone is avoided, it would set a precedent for a country to leave the union. Contagion risk will be high and the long-term consequences of a Greece exit would be extremely destabilizing for the entire euro zone.
Every time a country is faced with insolvency or has a heightened level of political strife, the stage would be set for further destabilizing pressure on the currency monetary union. Greece is not the only problem area, Portugal, Spain and Italy are also seen as high-risk nations within the euro zone. Greece’s debt to GDP ratio stands at a whopping 175.1%, while Italy and Portugal are at 132.6% and 129% respectfully.
Global balance of power. As the euro zone teeters toward a massive financial crisis, the situation reveals a more dramatic risk in the global balance of power struggle between the older industrialized Western economies and the fast rising powers in the East—namely China and Russia. Both China and Russia own massive holdings of gold, with Russia in particular being a voracious buyer on the global market in recent years.
Looking at World Gold Council data, Russia was the stand-out buyer of gold in 2014, as the country added 173 tonnes to its reserves. Now, Russia holds over 1,200 tonnes of gold and is the sixth largest holder of gold in the world. The Russian central bank has steadily been buying 10-25 tonnes of gold per month of the last five to six years.
The East is rising. As Greece edges closer and closer to a potential debt default and exit from the euro zone, both Russia and China are natural allies and partners for the ailing cash strapped island economy. Greece is looking for a safety net and these Eastern countries are poised to step in as China continues its move toward global political and economic dominance.
Who’s got the money? Through the first quarter 2015, China’s foreign exchange reserves remain the largest in the world at $3.73 trillion. The flush cash nation hasn’t been reporting its gold holdings to the international community, so their total gold holdings are unknown. But, China has essentially halted all international sales of gold produced domestically, as the country hoards the precious metals in its government coffers. China, a cash-rich nation compares favorably to the debt ridden western nations.
China’s cash holdings of $3.73 trillion versus U.S. national debt of over $18 trillion. Who’s got the real power now? Western central banks have resorted to money printing and creating more debt in attempts to drive economic growth. U.S. financial markets have become more dependent on what Federal Reserve Chairman Janet Yellen says than on real economic fundamentals. The U.S. and other western economies have built an economic system with smoke and mirrors and by manipulating monetary policy.
For individual investors the answer is gold. At the end of the day gold stands high and true as the first and true currency and measure of wealth. With multiple storms brewing on the horizon, do you want to be in a paper-based canoe or a rock solid gold battleship? Gold offers the ultimate safe harbor and vehicle for wealth preservation.
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