E.U. Greece Debt Crisis Impacts on Gold, Silver and Stocks
Commodities / Gold and Silver 2010 Apr 26, 2010 - 03:16 AM GMT
The EU raised its estimate on Greece’s deficit to 13.6% of 2009 GDP; and said it may revise it as high as 14.4%. Questions about its bookkeeping and data collection were said to be involved. Moody’s downgraded its sovereign debt rating.
In response, Greek 10-year bond yields rose to over 9%, which is almost three times the comparable German rate. The yield on the two-year note skyrocketed to over 11%. This prompted Greece to formally request the aid package from the European Union (EU) and the International Monetary Fund (IMF). Now the member countries must approve the loans and checks need to be written.
EU finance ministers have offered Greece 30 billion euros ($41 billion) in loans at below-market rates of 5%, while the IMF has pledged 15 billion euros. The aid package will help short term, by relieving the immediate risk of default, however, Greece must find similar funding (5%) for the foreseeable future (decade); otherwise it will remain bogged down in 
spiraling debt service costs.
The important issue is whether Greece can expand its economy while cutting its fiscal deficit and servicing its debt.
While the euro rallied Friday on the news that the financial aid package was moving forward, the long term trend of the euro remains down, as the first chart below shows.
The euro has weakened 7.1% against the dollar this year on concern Greece’s difficulty in containing its budget deficit will spread to other countries. Ireland’s deficit is 14.3% of GDP; Spain’s is 11.2% and Portugal 9.3%. The total budget shortfall for all 16 countries that use the euro widened to 6.3% of gross domestic product last year, twice the supposed EU mandated limit (3%).
The Greek aid package has increased the moral hazard that other EU countries will be slow to get their financial house(s) in order, thinking that there is no rush to cut their deficits because the EU and or the IMF will come to the rescue if push comes to shove.
This is not a fix for Greece’s problem. It is simply papering over what needs to be done: cutting back on spending and increasing revenue; which is a major problem going forward for all nations across the globe, including Great Britain and the United States, as evidenced by rising interest rates. Sovereign debt issues will become a household word over the next several years.
The true culprit in this and all the world’s financial problems is the fact that the global monetary system is one of paper fiat debt-money. You cannot pay off debt with debt; regardless if its non-interest bearing debt (US dollar bills or Federal Reserve Notes) versus interest bearing debt (sovereign government bonds).
This is the reason our Founding Fathers stated in the Constitution that only gold and silver coin could pass as legal tender; and that no bills of credit (promissory notes, i.e. FRN’s) could pass as legal tender between the states.
If the United States and the rest of the world truly want to solve the financial crisis that grips the globe, a sound monetary system of gold and silver must replace paper fiat debt-money; otherwise we are guaranteeing a future of debt servitude for all those yet to come. To accept anything less is to accept the unacceptable.
The aid package announcement sparked a rally in the euro, as short term traders were caught off guard. While this is short term positive for the euro, as the chart shows, the long term trend remains down.
Although the euro rallied out of its descending price channel, there is significant overhead resistance just above, from 136-138. A negative MACD crossover is in effect as well. Notice at the top of the chart that gold has been moving higher while the euro has been declining.
With the news on Greece’s aid package, Friday was a reversal day for the dollar. It opened up and then moved down to close near the lows of the day. While this is bearish short term, the long term trend for the dollar remains up, as the chart below shows.
Price remains well above support and within its rising price channel. A positive MACD crossover exists and the CCI indicator is moving up into positive territory as well.
The sovereign debt problem remains an emotional issue and the currency markets have been and most likely will remain volatile. Dollar weakness would place a bid under most markets, while dollar strength will impose a headwind.
Silver
As was shown in the currency and commodity sectors earlier in the report (full length edition for subscribers), silver has been outperforming gold and continued to do so this past week, gaining almost 3%, while gold gained 1.75%.
SLV tested its recent breakout and support held (17.25). Price has remained above its rising lower diagonal trend line. Money flows need to improve, but have turned positive. A possible MACD crossover exists, which would lend further confirmation and support to the move.
Up next is a chart of the gold to silver ratio. When the ratio falls from the upper chart area into the middle area, or further below to the bottom zone, silver is outperforming gold.
As of now, silver, as priced in dollar bills, compared to gold, priced in dollar bills, is gaining in “value”.
This brings up an important issue: the difference between gold and silver priced in Federal Reserve Notes (dollar bills); and gold and silver coin circulating as the currency according to the Constitution: by weight and weight alone.
The two are mutually exclusive and as different as night or day; just as the gold standard is different from gold and silver coin mandated by the Constitution.
The United States is still on a silver standard, as stated in the Constitution and the Monetary Act of 1789, which defines a dollar as 371.25 grains of fine silver. Without a constitutional amendment, this mandate still stands.
The U.S. is also on a bi-metallic coinage system, where silver and gold coins exchange by weight and weight alone – NOT by prices or numbers of Federal Reserve Notes (for a detailed account see the book: Honest Money).
The two systems are completely different and should not be confused. Paper is paper and honest weights and measures are just that – weights not bills.
Gold Stocks
Gold stocks (GDX) added 1.56 points to close at 48.21 for a weekly gain of +3.34%. They recouped most of last week’s minus -4.17% losses. As I stated last week:
“A three day close below 47 would invalidate the breakout. The GDX must reverse course if a failed breakout is to be prevented.”
With Friday’s drop in the dollar, the gold stocks shot up and closed at 48.21, well above the 47 breakout level. Now, broken resistance (47) must turn into support. This is imperative.
Money flows have expanded and a positive MACD crossover is needed for further confirmation.
The above excerpt is from the latest full-length market wrap report, available on the Honest Money Gold & Silver Report website. All major markets are covered: stocks, bonds, currencies, and commodities, with the emphasis on the precious metals.
In today’s turbulent times of financial crisis gold and silver are more important than ever. The precious metals and other markets are at crucial inflection points. Which way the dollar and the euro go will have a major impact on all markets – gold and silver included.
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Good luck. Good trading. Good health, and that’s a wrap.
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Douglas V. Gnazzo
Honest Money Gold & Silver Report
About the author: Douglas V. Gnazzo writes for numerous websites and his work appears both here and abroad. Mr. Gnazzo is a listed scholar for the Foundation for the Advancement of Monetary Education (FAME).
Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.
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