The Real Interest Rate Case For Higher Gold Prices

It is monetary politics, rather than politics per se that needs to be examined when trying to get a handle on the gold price and, at the heart of that is the state of real interest rates.

Author: Geoff Candy

GRONINGEN - 

Despite the noise, and there is plenty of it in markets at the moment, what is driving much of the gold market at the moment, as it has for the last decade is the state of real interest rates.

Speaking on Mineweb.com's Gold Weekly podcast, Bullion Vault's head of Research explains, "Gold is not an industrial metal, gold's use is social not industrial, and its social use is as a store of value, a store of wealth when people need it - it's not exposed to the economic cycle."

Ash points out that while fears about prolonged stagflation, fears of a true depression have helped gold up over the last few years, "on a big boring and technical level it is about negative real interest rates. When the return on cash is below zero after you account for inflation people will buy gold.  It's just a fact.  It is what happened in the 1970s and its what's been happening progressively over the last decade and particularly in the last three or four years now."

The reason for this he explains is that if people know that money put away on deposit will lose purchasing power they will eventually look for another way of trying to preserve value.

"Gold is a stand up candidate for that, primarily because of its five thousand years of history.  Wherever it's been discovered in the world throughout time it has been used as the ultimate store of value. People again are doing that today.  They are looking at something which is rare, it's tightly supplied and it's indestructible and that really makes it stand aside from cash, and debt instruments, bond investments where those are paying you less than inflation."

Where are we now?

Given that real interest rates are the major force behind gold prices, the signs would appear rather good for gold. As Ash points out, in the UK for example, citizens are living through the worst negative real interest rates on cash since 1978.

The U.S. and the rest of Europe are not doing much better either but, that is not to say that governments wouldn't want to have higher interest rates, but the weight of debt committments makes that almost impossible.

As Ash explains, "Government debt is so enormous as a proportion of GDP that governments cannot bear 5% interest rates.  I do think there's a case for looking at the 2007 banking crisis, the 2007 blow up.  US interest rates were creeping up towards 5% and the US economy couldn't bear them at that rate and things fell apart."

He adds, "We can see this in Greece right now.  How's Greece moving towards a restructuring?  We know it's going to happen whether it happens smoothly, whether it happens dramatically is really neither here nor there, there will be a write-off and creditors will be destroyed.  This is what happens after a debt bubble.  Always happens after a debt bubble, the creditors will wear it.  So people again are looking for something that is indestructible."

The situation in the U.S. is no less extreme, what with the nominal end to QE2 fast approaching and the arguments in Washington about the credit ceiling but, for Ash, much of this is besides the point.

"You do have this interesting confluence coming up over the summer of the nominal end of QE2, plus the debt ceiling arguments going on at the moment in Congress.  To be blunt that's noise because we know what central banks are going to continue to do, both in the West and across emerging markets as well.  Indian and Chinese real interest rates are very much below zero as well.  Similarly for consumer and households there, the savers in those emerging economies buying gold, defending wealth because cash won't".

Source: http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=129933&sn=Detail&pid=102055

10 reasons to own silver in 2011

After a strong year, silver started the first trading week of the new year at $31/oz., up over 100% since our Februarybuy alert. Silver prices have not only reached their highest levels in 30 years, but have seen their biggest annual gains in as much time.

Although a short term correction is possible, we expect silver prices to eventually climb considerably higher by this time next year for all of the following reasons:

10. Silver is both a precious and industrial metal. Unlike gold, which has little industrial demand, silver has myriad industrial uses, but has always and continues to be used to preserve wealth.

9. Silver conducts heat and electricity, reflects light better than any other metal. As such, silver is a component in practically every electronic device we use. As wealth continues to expand in BRIC countries, their appetites for electronics will continue to grow, placing further strains on the already tight silver market.

8. Silver:gold ratio remains far too high. Throughout history silver and gold have maintained a 10-15 ratio. Even in 1980, the height of the last commodities bull market, the ratio was roughly 17. Presently at 47, the high ratio leads one to assume silver prices will likely continue to outperform gold.

7. Global silver supply concerns deepen. Investment bank and other industry analysts estimate total 2010 global silver supply (production and scrap supply) to nearly match combined industrial and investment demand (e.g. see BNP Paribas and BMO analysts’ reports). Gold, on the other hand, is widely expected to see surplus supply.

6. Global silver reserves are at their lowest levels. The Silver Institute estimates that total silver inventories dropped over 85% in 2009 to 20.6 M oz and that after significant sales, total government reserves are presently half of 2008 totals.

5. Silver is cheap. Potential precious metals investors who perceive gold as expensive at $1,400/oz. are likely to consider purchasing silver at just $31/oz.

4. India increases silver imports. The world’s largest silver consumer, India will have likely imported at least 20% more silver than in 2009, according to the Bombay Bullion Association, which also expects the trend to continue well into 2011.

3. China cuts silver exports. China shocked investors when it reported a 60% decline in exports during the first eight months of this year, according to customs data. China’s total silver production figures were down nearly 2% over the same period.

2. Peru’s silver output falls. Peru, the world’s largest silver producer, by far, recorded a 4.4% decline in exports during the first 7 months of 2010. Monthly silver output fell between 7 and 12% from August to November 2010, leading us to doubt GFMS’ expectation that global silver output will be substantially higher than last year.

1. Chinese investment demand soars. China’s silver imports have thus far jumped 15% in 2010, making China a net silver importer for the first year in recent decades. However, silver trading on the Shanghai Metal Exchange increased an astounding 290% during the first 3 quarters of the year.

We are Way Over the Edge Right Now

Last Friday, I wrote a piece called “Could America be Pushed over the Economic Edge?” It was about how Libya, Japan or even covert economic warfare (from America’s enemies) could push the U.S. into another financial meltdown.  I received a one sentence email from my friend Jim Sinclair that said, “We are way over the edge right now.”His message gave me a sinking feeling.  Mr. Sinclair is a world renowned gold expert, but in order to trade that market, you must be extremely knowledgeable in many aspects of economics and politics.  Almost everything affects the price of gold.  War, government, oil, debt, money creation, the Fed and many other variables can dictate how much the yellow metal costs.  Gold is probably the single most difficult market to trade, and Sinclair is the Yoda of gold traders (except much better looking.)

Last week on his website JSMineset.com, Mr. Sinclair outlined “why” we are already way over the edge right now and why gold is going much higher in price.  Here are a few of his reasons that I picked out from his bullet pointed post:  “You must realize that the economic and political damage is already done.  You must realize that the mountain of OTC derivative paper is not going away. . . . You must realize that this means the mountain of OTC derivative weapons of mass financial destruction can only grow. . . .You must realize that it is not whether or not QE will continue, it is what it already has done to the Western economies that much higher gold prices will reflect. . . .You must realize the monumental change in the Middle East is NOT positive for the West in any manner, shape or form. . . . You must realize that it is the currency that breaks, not the country.” (Click here for the entire Jim Sinclair post.)

This is not some far-fetched assessment of the U.S. economy because at least one Fed banker is also sounding alarm bells.  CNBC reported last week, “The United States is on a fiscal path towards insolvency and policymakers are at a ‘tipping point,’ a Federal Reserve official said on Tuesday.  ‘If we continue down on the path on which the fiscal authorities put us, we will become insolvent, the question is when,’ Dallas Federal Reserve Bank President Richard Fisher said in a question and answer session after delivering a speech at the University of Frankfurt.”  (Click here to read the entire CNBC story.) There is absolutely no way a top Federal Reserve banker says this without it being common knowledge in his circle of power–no way.  This tells me the Fed realizes the economy is much worse than what anyone would admit

For some real world confirmation of a cliff diving economy, I turn to John Williams, founder ofShadowstats.com. In his latest report, Williams says, “Both existing and new home sales moved sharply lower in February 2011, down 9.6% and 16.9% on a monthly basis . . . Foreclosure activity remained an intensifying distorting factor for home sales, with “distressed” activity accounting for an estimated 39% of existing sales in the NAR’s February reporting, the highest portion seen since Spring 2009, and up from 37% in January.” Four out of every 10 homes sold are foreclosures!  That is not a healthy housing market or sign of a recovering economy.  There was a record one million homes foreclosed upon in 2010, and experts predict another record breaking year in 2011.  Williams is predicting an “intensifying double-dip recession and a rapidly escalating inflation problem.”

To regular readers of sites like this one, the economic problems we face are not surprising.  But for every informed person, there are probably hundreds that have no idea how bad the economy really is.  As an example, one new reader wrote me last week and said, “We are indeed going through some of the craziest times I can ever remember and although things are crazy, do you really believe we will all NOT get through this as a society?  How can the entire country go under?” The answer to the first question is some will get through this a lot better than others.  Those people include folks that have little to no debt and have a well-diversified portfolio that includes physical precious metals as the ultimate form of insurance against financial calamity.  As for the second question: “How can the entire country go under?” I refer back to what Jim Sinclair said earlier, “You must realize that it is the currency that breaks, not the country.” If you can grasp the enormity of that one simple sentence, you have all the information you need to protect your wealth.

Don't Wait for GDP, $1,500 Gold IS the Recession

Back around 2005 when housing was booming, far from a sign of economic vitality, the proverbial "rush to the real" signaled a growing economic downturn. Thanks to a dollar in freefall as evidenced by a spike in the price of gold, always limited capital was migrating toward the hard, unproductive assets least vulnerable to currency devaluation.

To put it simply, the real recession was the housing boom.

Since the dollar's lurches in either direction tend to set the tone for global currencies, our monetary error was something shared by everyone as a run on paper currencies around the world fostered a global misallocation of capital into land, rare stamps, art, gold and other unproductive assets. The alleged worldwide boom characterized by a rush to the tangible was a classic "money illusion" that flashed economic hardship due to the world's innovators suffering capital deficits in concert with sinks of hard wealth receiving capital in abundance.

Happily, markets are nothing if not self correcting, and the misnamed "recession" of 2008, which was in fact a positive signal of economic rebound as housing and other hard assets ceased their bull run, was the corrective mechanism meant to reverse a substantial episode of Austrian School malinvestment. Of course, and as is well known now, rather than embrace the curative powers of what was once again a misnamed "recession", the political class set out to blunt its positive effects through bailouts and other subsidies of failed ideas such that Americans were robbed of the positive economic snapback that "recessions" always author.

The above surely looms large at present, because it's not unfair to suggest that we're experiencing yet again the severe capital misallocations that forced a distorted correction in 2008. To see why, look at the gold price.

Though it traded in the then nosebleed range of $800/ounce back in 2008, gold has since nearly doubled to $1500/ounce. Its spike to previously unseen levels is a signal that all the chatter about whether there will be a downturn is well too late. Gold at these levels IS the downturn, and an eventual "recession" that hopefully includes a revived dollar to undo all the misallocations occurring at present will be the cure.

Indeed, much as the weak dollar drove a recessionary rush into the real not long ago, so is the same occurring once again. This, not the inevitable correction, is the true recession, and that's why the gold price (nothing more than a proxy for the dollar's actual strength or weakness) is so useful as an economic signal.

Gold's rise is the dollar's decline, and it confirms as it always has that today's and tomorrow's innovators will suffer a capital deficit relative to the kind of investment they'd receive were the dollar strong and stable. Evidence of this recessionary malinvestment abounds, but one obvious example of it concerns farmland prices.

As Forbes editor-in-chief Steve Forbes recently noted in one of his essential Fact & Comment pieces, farmland prices were up 12% last year, and have doubled over the past decade. During this time, agricultural lending has risen 98%.

Think about the above for a moment. As Americans we're lucky enough to live in the most economically evolved country in the world when it comes to our labors, yet prices and investment in a sector that largely impoverished developing country countries usually spend a lot of time on are skyrocketing.

Adam Smith centuries ago warned of the economic hardship experienced within regions of stationary economic activity, but what about the ones moving backwards, in our case to an agrarian period characterized by low living standards and work of unrelenting drudgery? This isn't to say that all investment in the U.S. is moving "back to the land", but the idea that much at all would is an economic signal that should concern us all. The weak dollar is the big driver here, and it's authoring our partial lurch to a more depressed past.

Looking at oil and the gasoline that it is ultimately refined into, the prices of both are high because the dollar is cheap.  Keynesians will doubtless note how expensive gasoline will depress consumption, but the greater, more "recessionary" negative of $4 gas is how the cost of one of life's essentials will depress savings, and with that, the growth capital that funds entrepreneurialism.  Devaluation is surely cruel to the consumer, but it's devastating to the entrepreneur, not to mention the individuals who might like to work for the entrepreneur. 

So while the always faulty GDP number has yet to register a downturn, fret not because we're in the middle of one. Inflation, meaning a decline in the unit of account, always coincides with reduced savings, and then a misallocation of available savings into unproductive, tangible assets least vulnerable to the currency devaluation.

In short, $1,500 gold IS the downturn, precisely because of what it tells us about the direction of limited capital. As for "recession", though painful, that's what we'll hopefully celebrate sooner rather than later as investors reorient capital away from land, art, rare stamps and faulty lenders/investors who've bought into the money illusion that is today's economic pain.

Double dip? It's already here.

DEFLATION IN OUR FUTURE

DEFLATION IN OUR FUTURE

Make no mistake, the four-day rally we just saw was nothing more than short covering in front of the Fed meeting just in case Bernanke surprised us with QE3. As expected he confirmed that QE2 would end on schedule. The dollar rallied and the market sold off on the news.

Folks, I don't think this is over yet. In the chart below you can see that every intermediate cycle low exhibits some kind of capitulation volume as market participants panic.

We clearly have not seen any kind of a selling climax yet. As a matter of fact volume has been running slightly lower than average. This is not what happens at a true intermediate bottom.

The average duration of an intermediate cycle is between 20 and 25 weeks. Two of the last three intermediate cycles bottomed perfectly in that timing band. The March cycle was slightly shortened by the Japanese tsunami which generated tremendous bearish sentiment in a very short time.

However there is no serious calamity that should shorten the current cycle to 13 weeks. One could claim that the Greek situation is driving the decline, and once it gets resolved the correction will end. I think that's highly unlikely. The market has known for over a year that Greece is going to default. There's no surprise there. I suspect the next Black Swan will come in July as Spain, or Portugal, or Irish bond yields spike, or something completely out of the blue occurs, like an implosion of the Australian housing market. It's in times of stress that flaws in the system break.

Since we don't have any capitulation volume yet, and it's still too early for the intermediate cycle to have bottomed, the assumption is that this correction isn't finished.  

So far the market is still following the template I laid out in "The Bear is Back" post. I expected some kind of counter trend rally to relieve  extreme bearish sentiment levels and oversold conditions. We are getting that rally now (it may have already ended). 

Once the counter trend rally runs its course the market should have another leg down, bottoming in late July to mid August. At that point I expect Bernanke to freak out and initiate QE3. That will be the signal for a more durable, and probably explosive rally. 

But remember, the most violent rallies occur in bear markets ! 

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Betting on the end of the world - gold

Anyone following along on the world debt crisis can see everybody is broke. And the speculators are betting on who goes down first then second and so on. That is a TON of money betting on more financial chaos destabilizing markets. The Central banks have done everything they can to combat it and they are falling behind now. Its about over, this several year hiatus from the financial crashes of 2008 and 2007.

I cannot imagine the people at CNBC going on air live day after day tracking this chaos.

Gold and oil are steady

The only market which is showing some rationality is oil and gold. Gold especially. Every other market is infected with hundreds of billions of carry trade money. So – no logic, only speculation and big swings. Even silver is getting jacked around because it’s so speculative (always has been – you might want to shift some silver into gold as gold is not so wacky).

But following along on markets, everything is speculation now, and has leverage. And the Credit Default swaps market (bets on credit and bonds of all types) is rampant. They are betting on who will go bankrupt first, and this is over entire countries now! They are betting on the end of the world! Every time the CDS market panics, another $hundred billion bailout is voted in.

Remember the flash crash? Did anyone mention that the next day the first huge multihundred billion Euro bailout was voted in that weekend by the EU. They were given a huge threat. That flash crash was not an accident. Did u hear anyone being investigated? Have you heard of ANY bankers other than like two getting jailed for all the losses around the world in massive fraud? Nope. They are all walking! They are all bold as hell and they are all connected with organized crime! Yes. Half the bankers are organized crime.

Who is the next carcass?

So everyone with billions to bet is jumping on the sickest carcass, the only end can be a total collapse of each country in turn financially. The weakest ones first. When the Shit hits the Fan, the biggest carcass out there will be the USD and the USA. The only money big enough to withstand these attacks are government treasuries with public money, and this is running out! Try getting the US to do another bailout of $800 billion now with the US budget crisis. That type of effort is history. So where is the money going to come next? Probably from a massive stock crash. And another bank panic. And add a Euro crisis on top. A nice multilevel cake of financial doom.

Euro is right on the edge

We are on the verge of another Euro crisis right now; Greece (whose people are notorious for not paying taxes) is holding a gun to Germany and France’s heads. If each new country in trouble is not bailed out, Credit Default swaps (bets on credit about to go bad) drag down every major bank in civilization except maybe the Namibia bank which only has ten dollars net anyway.

But the other banks in Germany, the US, and France, all will go down if either Greece or Spain crash hard. And they will too. The biggest problem Greece has is they don’t pay taxes and the government is effectively running its entire self on loans from whoever get held up in each installment of the next bailout, and the next and the next…so far a two year long story.

Euro headed for existential crisis

So, Greece WILL go down and the feared international bank crisis will unfold once again. It’s only a matter of time. I would bet the Euro has an existential crisis within two years. So will the USD. We have two years left max. The next solution will be a global money system or at least one for the entire West, and one for the Asians. I would bet ten to one that all the tax deferred savings in the Western countries will be tapped for the last final bailout.You’ll be forced to buy US Treasury bonds. You will see. (People don’t get what tax deferred means. It means that when you take out the money you pay the tax then, not when you earned the money, hence they can just raise the tax rates for those withdrawals, and…to boot, to even get the tax exemption, you will be forced to buy ‘qualifying tax deferred investments’ – you know what that means or do I have to spell it out for you?)

No way out

In other words, Greece and the EU is hostage to this crisis. So is the Euro. Now let’s ask a question, what will be the outcome of this situation? Will the Euro survive another summer and not go under? Such a question of the Euro going down has to send shivers through all Europe.

So who goes first, the Euro or the USD? I bet the Euro. The US has its own problems but we can still borrow a ton of money – so far.

In the latest Fed bailout, Greek CDS holders were bailed out again by the US and other countries. If not Greece would have imploded already. So, the CDS markes get to bet on the demise of Greek bonds, but their losses are guranteed against by the public, or else the entire world bank system collapses! Nice.

We need to think what would happen if Greece did not get bailed out again. Because the day is coming when the next bailout of Greece or especially Spain, is going to fail. Then we get the chickens all around the world coming home to roost. That will be mega bank crisis number 3 (the Bear crisis of 2007 is number 1, the Lehman crisis in 2008 is number 2).

Bear, then Lehman then - Greece

The Greek thing is bad enough that even China was jumping into their debt markets in recent weeks buying the debt because if they didn’t the Euro was crashing. In other words, the entire world is now hooked together in a common fate, a debt spiral that is bankrupting everybody, and the only sources of credit left, frankly the US Fed, is all that stands between our savings and a 4000 point stock crash, to begin with.

If your money is in stocks it’s a sitting duck. There are stocks that I like and but we are waiting for a stock correction at least before we consider buying. That leaves things like gold and gold stocks and cash savings for now.

USD rally

If the Euro were to crash the USD would continue rallying (we called the USD bottom on April 25) and this would cause pressure to unwind markets because the USD has been the carry trade currency of choice since about 2006. Which means that all that borrowed stock money invested by banks in the stock markets will want to come out. (In the Fed market support operations like QE, the banks borrow money at a half percent and buy stocks, the Fed intended this to support stocks, when the USD rises they have to unwind those trades).

Ultimately, the US credit ratings will get downgraded (noises to that effect already by rating agencies) and US interest rates will rise. Ultimately credit which has kept markets from crashing will disappear, and the USD will face its first existential crisis. In that case we estimate the first shock to the USD would be a 30 pct. haircut in FX markets. That is almost impossible to imagine. This IS coming.

Usually, other central banks will step in to stop the USD from falling. But this time, there is much less money to throw at the problem. The world is on the brink of another bout of financial chaos, only this time it won’t stop with some emergency bailout. And the problems are much bigger now.

The interesting thing is that the USD is rallying, but the reasons are there. The Euro is in so much trouble, I am amazed that it’s even over par with the USD. The only banking system that is working is the US related one. Tell me that is not the case as the Fed bails out foreign banks every week? This is not reported now. The China bank system is a joke and not ready whatsoever for the coming crash there.

A very disturbing trend is stories that China and Russia have divested much of their US Treasury holdings. They did this as the USD rose recently.  Perfect timing.

Christopher Laird

PIMCO'S Gross says Fed to unveil QE3 at Jackson Hole

(Reuters) - Bill Gross on Wednesday said the Federal Reserve will likely hint at a third round of bond purchases, better known as "quantitative easing," at its next Jackson Hole meeting in August.

Jackson Hole is an annual global central banking conference, led by the Fed, which takes place at Jackson Hole, Wyoming. It was at this event last year that Fed chairman Ben Bernanke said the U.S. policymakers were prepared to make a major new investment in government debt or mortgage securities if the economy worsened significantly or if the Fed detected deflation -- a prolonged drop in prices of wages, goods and assets like homes and stocks.

Gross, the co-chief investment officer of PIMCO, the world's top bond manager, on Wednesday said on Twitter: "Next Jackson Hole in August will likely hint at QE3 / interest rate caps."

PIMCO oversees more than $1.2 trillion in assets, mostly in fixed-income. PIMCO confirmed Gross had sent the Tweet on QE3.

Last week, Gross first introduced the idea that the Fed on Wednesday could signal that interest rates could be capped if warranted due to soft economic growth.

Gross said on Twitter last week on Tuesday that: "QE3 likely to take form of 'extended period' language or interest rate caps on 2-3-year Treasuries."

Gross also said on Twitter last week: "Next week's Fed statement will likely stress 'extended period of time' language or even a period of interest rate caps."

The Fed will issue its policy statement after the close of its meeting on Wednesday.

The recent soft patch of economic data has increased speculation over whether U.S. policymakers will perform a third round of bond purchases, an unconventional monetary measure known as "quantitative easing," or QE2. The second round of QE2's $600 billion in purchases will conclude on June 30.

(Reporting by Jennifer Ablan; Editing by Leslie Adler and Andrew Hay)

Looking ahead of gold and economy

Greece

This weekend, the E.U. Ministers promised the next tranche of money to Greece and a second bailout package ifGreece enforces another bout of austerity on itself. Does this clear the E.U. of its obligations? They have not yet finalized these terms and await the next episode in Greece of its acceptance of this principle.  

A default by Greece will set off a chain of events that would bring down important banks as well as Portugal, Ireland and Spain, with Italy stepping onto the same stage. Furthermore, a default shows that even governments have to pay their bills, if they want the financial system to work.  

The issues involved are significant.
The consequences are even more far-reaching.

The ‘Moral’ Issues

Are politics more important than finance? If an electorate or a body of elected officials decides that they are not able to repay excessive debt, are they entitled to refuse to do so?  Or are they entitled to dictate at what pace and volume they repay debt?

It appears to be accepted that shareholders and owners carry the risks of their investments and suffer losses if their investment fail, but should bankers have to suffer losses if they lent recklessly? If they over-lent, should they suffer losses too? They should and it is the law worldwide.  

If a nation defaults, should creditors be able to seize assets inside a country? International law brings Jurisdiction onto the table and the law of Jurisdiction in this case deems the debtor controls the decisions on how the law is applied. If the Greek Parliament says it won’t be paid, but will, in their way and time, then that is law.

These are the issues under discussion in Europe and these are the issues to be tested in the days to come.    We live in a global world now where banking and their loans assets bases, etc, stretch across the world.   Government business has always been so certain and profitable; however, now that governments have become dubious debtors, the applecart is overturned. There is no clear international procedure that governments will follow in the event they stop following the ‘rules’. There are a firm set of rules for the system to work. This is not just about Greece. It is about all governments whose debt is moving into the high-risk area. Ireland, Portugal, Spain, Italy, U.S.A.

If there is no set of rules, who do creditors turn to? The U.N.? If there is no overseeing final authority, what happens to international debt obligations? What happens to currencies and their value? After all, they are an extension of nation’s creditworthiness. We live in a world of change, even moral change.

Looking Ahead

Morality often gets trampled in the need of the moment. When different moralities clash, the gravity of decision-making goes to the one with the most power. At the moment, power lies in the hands of the Greek Parliament and they have to rule on the 21st of June. If they choose not to support Papandreou, then they will trigger a chain of events that will have considerably more impact than simply the Greek balance sheet and government funding. Life goes on.

Greece

• The government and civil service will face bankruptcy, as will all dependant services.  A ‘snap’ election will surely follow.
  
• Greece may well be forced to impose Exchange Controls almost immediately to prevent capital (what’s left of it) from leaving the country.

• They will have to turn to the Drachma with a two-tier currency system, one for trade and one for capital (at a hefty discount for those putting money into the country and at a huge premium for those wanting to take it out). With such a cheap currency, they will see a tourist boom like they’ve never seen before, as Greek prices, in other currencies, dive.

E.U.

• European banking will reverberate with the blows a default causes.

• The euro itself will fall like a stone.

• The debt crises of the other European debt-distressed nations will be infected by the Greek scene and likely follow suit as creditors press for repayment.

• The E.U. will have to decide its own future and their membership, but more and more potential loans will dry-up in future. 

• It may even be that the E.U. eventually has only the northern, more prosperous nations as members, with a significantly stronger euro than at present.

U.S.

• The U.S. battle over the raising of debt ceilings will be taken in a much more serious light and when the game of ‘chicken’ reaches its crescendo in early August, the markets will react far more strongly than at present. 

• Should politics continue to be given a higher priority than debt obligations in the U.S. into August, then the consequences to the entire monetary situation will be dire.

• Debt-distressed States will battle for Federal support.

• A double-dip recession in the U.S. will almost certainly follow.

The loss of confidence will fragment global banking and international financial support, creating a far more volatile global financial situation.

Future global growth will be the casualty.

Currency Doubts

The first major consequence will be that currencies will cease to measure value. With the two major currencies, the dollar and the euro, having lost their reputation, other currencies (for the sake of their international trade competitiveness) will lower interest rates and do whatever they can to keep their exchange rate low, despite their good name. Hence, currencies will become a needed means of exchange with uncertain value. This will bring exchange rate volatility that may in turn have a detrimental impact on global trade.   Deflation will frequently become a feature of nation’s economies.  

Why gold prices will continue to stay high

Gold prices have been on a roll over the past few years. The precio US metal has given a return of about 160% in the past five years. That is, if you had invested rupee 100 in gold back then, it would be worth around rupee 260 today. Now, compare that to the investment made in the stock market during the same period. The 50-share NSE Nifty Index, which is a broad representation of the Indian stock market, has grown by around 83%, which means that rupee 100 invested in the stock market five years ago would have grown to rupee 183 by now. 

The point is: return from gold has been almost double than from stocks. But that, as they say, is the past. What about the future? Will gold continue to perform as well as it has in the past? The answer is most likely yes. Gold prices will continue to rise even further in the days to come. Here are some reasons why. 

CENTRAL BANKS BUYING GOLD 
For many years, central banks around the world have been net sellers of gold. But in 2010, after a very long period, they became buyers again. "Central banks have been net buyers of gold in 2010 for the first time in the past 21 years," says Devendra Nevgi, founder & principal partner, Delta Global Partners. In 2010, central banks bought nearly 76 tonnes of gold. 

This trend further accentuated in the first quarter of 2011, when central banks were net buyers of gold to the extent of 129 tonnes. Central banks were selling gold for a while, reaching a peak sale of 674 tonnes in 2005. "The current purchases are a reversal of that trend - a case of sell low, buy high (a curious recipe for gain with public money!)," remarks Satyajit Das, a world-renowned derivatives expert, and the author of the soon-to-be-released Extreme Money: The Masters of the Universe and the Cult of Risk. 

WHY THE TURNAROUND Over the years, the central banks have had a major portion of their reserves in US dollar, with a minor portion in other currencies like euro and yen. This trend is now changing. As Ritesh Jain, head of investments, Canara Robeco Asset Management, explains: "The rise in gold prices has caught the eye of various central banks who believe it is a welcome addition to their reserves given its status as 'store of wealth' even during periods of crisis. Thus, the central banks have indicated their preference to hold gold over a depreciating asset (read US Dollar)." 

Most of the bigger economies around the world have been printing currency big time to revive their moribund economies and also to pay off the loads of debt they have accumulated. This has led to a threat of paper currencies collapsing and, hence, the flight to the "safety" of gold. "There is concern over the major reserve currencies like the dollar, euro and yen," says Das. "The only way for the over-indebted western economies to get out of the mess is to print more money," says Jain. "Since gold cannot be printed or mined that fast, the value of currencies is sinking against gold." This means the price of gold is rising. 


CHINA TO BUY MORE GOLD 
China's foreign exchange reserves currently stand at $3 trillion and gold as a percentage of these reserves forms only a miniscule 1.8%. But this dependence on the dollar is gradually coming down. "Countries like China who are amongst the largest holders of US dollars are, in fact, diversifying away from the dollar by selling dollar and buying gold," explains Jain of Canara Robeco. 

As a recent report titled In Gold We Trust, brought out by Standard Chartered, points out: "Currently, 1.8% of China's forex reserves is in gold; if China were to bring this percentage in line with the global average of 11%, it would have to buy another 6,000 tonnes of gold, or more than two years' global mine production (of gold)." Imagine what that would do to the price of gold. This is also true of other major holders of foreign exchange reserves like Japan as well as India. Japan's gold reserves stand at a miniscule 3.2% of its total foreign exchange reserves of $1.14 trillion. India's gold reserves at 8.2% are much closer to the world average of 11%. 

SUPPLY LIKELY TO REMAIN TIGHT 
Over the past 20-odd years, the supply of gold has been growing at the rate of 0.7%. The main reason for this has been the decline of South Africa as a major supplier. As the Standard Chartered report says: "A very important driver of the slow production growth was the dramatic decline of South Africa (as a producer),which produced about 1,000 tonnes in 1970, but below 200 tonnes last year (ie, 2010)." The supply is likely to remain tight as very few large gold mines are expected to come up. 

Over the next five years, only seven gold mines that are capable of producing more than 500koz (1 oz =31.1 grams) are expected. Also, gold mines have a high lead time and take time to set up. As the report points out: "According to a study conducted by MinEx, the average lead time for the 214 greenfield projects in 1970-2003 was about 5.4 years in Australia, Canada, and the US, and 8.3 years for other countries." Also, as explained above, central banks, which were major suppliers of gold, have now turned buyers. 

This means a lot of supply of gold will come from scrap sales. As Nevgi explains: "Supply mainly comes from mines and recycled scrap; there is no central bank sale happening now. The scrap supply though tends to be more price sensitive. Since the demand-supply situation remains tight, any incre-mental new demand for investments or from China would take the prices higher." Due to these reasons, the supply of gold will be lower than the demand over the next five years. Even if the demand remains flat for the next five years, there is likely to be a supply deficit of 665 tonnes, the Standard Chartered report says. This clearly will lead to a higher price.


GROWING PER CAPITA INCOME IN CHINA, INDIA 
The rise in the price of gold has shown an almost one-to-one correlation with the rise in incomes in China and India (as can be seen from the accompanying table). While Indians have been traditional buyers of gold, the Chinese have been fast catching up. "India and China continued to provide the bulk of the demand as they contributed to more than 1/3rd of the entire demand in the first quarter primarily on account of rising inflation," says Jain. "Another key statistic which came out was that the annual gold demand in 2010 from China crossed the 700-tonne mark for the first time." 

WHERE ARE GOLD PRICES HEADED? 
"I can only quote JP Morgan and say 'it will fluctuate'," says Das. Nevgi feels gold has the potential to easily rise above $1,600 per ounce (or about .`23,200 per 10 grams) or more in the medium term. Jain is more optimistic. He feels that gold prices will continue to accelerate over the next 4-5 years and will enter the last phase of bull run from 2012. "After a period of consolidation and sideways movement in the $1,400-$1,500 band, gold will break out to $1,700 per ounce (.`24,600 per 10 grams) before the end of this year. Gold prices are set to surge to $2,000 per ounce (.`28,900 per 10 grams) by 2012 and $3,000 per ounce (.`43,400 per 10 grams) by 2015," he says.