Greek Gold

greeceWithout question, one the main themes in financial circles this past year has been the ongoing troubles in Greece and its economy. We thought it might be prudent to provide a little background on this situation, and how it may potentially impact not only gold and precious metals but global financial markets. First off, the Greek Government, like many if not all modern day governments, relies on borrowed money to fund its operations. Greece was hit particularly hard during the recent recession, and tax revenues fell while welfare payments rose. Adding to the difficulty are several Greek monetary policies, including generous pensions and other benefits. Greece was able to balance the books for some time, even as the difficulty in doing so began to mount. Investors began to take notice, however, of how tight things were getting financially, and began to get more nervous about Greek markets and debt. To make a long story short, as investors get more nervous about getting their money back, they demand a higher yield in return. This is simply a question of risk versus reward. If I think that an entity could potentially default on a bond, I am going to want a higher rate of return to take that risk. And so it began. Greek bond yields began moving higher and in the process significantly increased the country’s borrowing costs. As borrowing costs rise, it becomes more and more difficult for a country and its economy to “grow” itself out of trouble. Once Greece’s debt was lowered to junk status by major rating agencies, all bets were off. The country could no longer afford its borrowing costs, and even had its international overdraft facility cancelled. Greece had no choice but to turn to the European Union and the International Monetary Fund for help. The IMF is considered to be the lender of “last resort” and Greece’s appeal to the union for help underscores just how serious the situation had become. Unfortunately for Greece, as a member of the EU the country does not have the ability to devalue its currency or lower interest rates in order to try and boost its economy. Instead of these more traditional measures, the country was forced to begin cutting expenses… AUSTERITY is the term used to describe measures requested of and taken by Greece in order to secure various bailout packages from the ECB and IMF. Some of these measures include:

  • Tightening of fiscal budgets
  • Pension reforms
  • Public sector job reforms
  • Additional rigid spending cuts

One does not need to be an economist to come to the conclusion that such stiff austerity measures may have significant undesired effects. While Greek leaders have agreed to many measures, they have fought implementation of others. While according to some there is a degree of improvement being seen in the Greek economy, according to many others, the “ground level” situation has not changed much. The reality is that there may be no way for Greece to recover under current conditions. When an economic engine is not growing but is also being choked off by austerity measures, the engine cannot reach an output level needed to overcome debt. Such is the case with Greece. While there is constant talk of Greece in the news, and constant speculation on what may or may not happen, the country is currently fighting for its life. Ongoing negotiations between Greece and its creditors have thus far not appeared to yield significant progress. The country did make a debt payment to the IMF last week, but has another payment due this Tuesday in the amount of 750 million Euros.  Even if the country is able to make this payment, it has much larger payments coming due this summer to the ECB. Greece has resorted to requiring all public institutions to hand over their cash reserves so the country can continue to meet its obligations. Despite this measure, Athens is running out of cash, and fast… The debt burden in Greece may be insurmountable. Some believe that the question is not if Greece will default, but when. Looking at bond spreads on Greek debt, it would certainly appear that many investors believe the country will default on at least some of its debt. A Greek default could not only forge the country’s exit from the European Union, but could trigger a global financial panic. The uncertainty surrounding such an event would be felt all over the globe. In such a scenario, risk aversion could set in quickly, causing a massive sell off in equities and other risk assets. Bond yields could revisit their lows as investors seek out their perceived safety. Precious metals such as gold and silver could potentially see significant buying interest as investors flock to them for their stability. Unlike “paper” assets, gold cannot go bankrupt or default. Gold is often bought in times of economic, currency or geopolitical crises.  A Greek default would be all three… Now is the time to consider what a Greek default could mean for you and your portfolio. It is a time for reflection as well as planning for the future. Don’t wait until it’s too late. A massive equity sell off could potentially wipe out billions of shareholder value. Now is a time to be proactive, and to consider asset classes like gold and silver that have proven to be stable and reliable. For more information on how physical precious metals may benefit your portfolio and provide protection from the unknown, please consult with an Advantage Gold representative today. Our precious metals IRA specialists will walk you through the ins and outs of physical gold or silver ownership, and show you just how simple and convenient it is to add physical metals to your portfolio today.

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