THE EUROZONE WILL CONTINUE COLLAPSING : BUY PRECIOUS METALS TO PROFIT / SEEKING ALPHA ( HIGHLY RECOMMENDED READING )

The Eurozone Will Continue Collapsing: Buy Precious Metals To Profit

by: Penguin Capital Markets

September 16, 2011


This week, markets rallied upon news that the ECB was going to extend credit lines to troubled institutions in the eurozone, specifically Greece. This is despite heavy opposition from huge segments of the European population. Merkel for example, is facing heavy political backlash in Germany. This isn't surprising given that about three out of every four Germans completely oppose the bailouts.


"The ECB said it coordinated with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to extend three-month loans to euro-area banks in an effort to ensure they have enough cash for the rest of the year. The leaders of France and Germany confirmed this week they will support Greece’s continued participation in the shared currency."


Source: Bloomberg


As you can see, the ECB is struggling with the situation, and had to pull some favors from multiple sources just to keep Greece from drowning in debt before we reach 2012. As the need for Greek bailout money continues in a tight loan market, the only question is when, not if external funds will dry up and a real solution is required. Ultimately, it's just procrastination for the sake of politics.


Gold didn't look this attractive much earlier in the year, as corporate profits were rocketing upwards and the employment data actually showed some good signs. Even the fact that the end of QE2 was in sight sparked some hopes. The National Bank of Greece even managed to sustain a gain in February - things looked pretty good. The yellow metal was trading close to $1400/oz. and even trending down despite QE2 operations. Now of course, it's at about $1800/oz. Silver has done even better, going from just under $30/oz. to about $40/oz.


The huge gains made by these metals makes it harder to see why they could continue to go up, but as more and more macroeconomic data compiles, the bullish case for the precious metals gets better and better. Consider the Greek situation - this nation with a GDP of $330 billion (about €240 billion) has to pay back €350 worth of debt.


The country had to borrow heavily from the ECB this week (who had to borrow heavily from other banks) to even close its deficit on a short term basis as outlined earlier. This is one very sick puppy, and the fact that the leaders of the European Union want to keep it from defaulting is just going to drag the euro into a bigger hole as time goes on. The country simply cannot produce enough to keep it up. Letting Greece default (what I thought they would do) would have really been one step in the right direction for the euro and eurozone in terms of politics and stability.


While the U.S. isn't big on exports anymore, at this stage of the economic "recovery" we definitely do not want a strong currency relative to the rest of the world. If Europe prints to cover its debts in the future, we'll have deflation or at least a terrible exporting disadvantage if we don't do the same. Deflation is something any Keynesian economist like Bernanke will avoid like the plague. Even if there is dollar appreciation and treasury yields are ridiculously low for now, things can swing the other way (and fast) when the fed begins to take action to protect the US economy as a whole.


Then, there is the elephant in the room. I am of course referring to U.S. debt, which is about $14.7 trillion. Our GDP is estimated to be $14.12 trillion. There is no nation in the world that is capable of bailing us out of that one, so is there any way we can pay off a whole year's worth of GDP? Yes - if we reduce the value of the greenback! The long term alternative is a total default of the United States. Talk about an apocalypse.

Ultimately, gold and silver are the best way to bet against this musical-chairs of debt and currency devaluation. After seeing the action of the ECB since August, it's become increasingly apparent that the debt problem is not going to be fixed without massive currency devaluation by central banks. There is simply no feasible alternative other than massive defaults which would send precious metals rocketing up anyways due to their safe-haven status. So in conclusion ...


Europe is increasingly unlikely to solve its debt crisis without heavily increasing the money supply, as nations like Greece will continue to weigh down on the euro.


The United States is increasingly unlikely to solve its debt problem without printing, especially as new government spending ideas like the latest Obama jobs plan continue.


Deflation is extremely toxic to an economy, and there's no reason to expect the fed to allow it to happen.


The alternative is defaults, which will cause a massive rush to precious metals.


Asia doesn't have the cash to bail out our debts forever (the clock is ticking).


Gold and silver will show strength in both bear markets and high inflation environments - the two most likely outcomes.


GLD and SLV are the two main ETFs for the precious metals. I honestly think we can see some pretty eye-popping numbers as this fiasco drags on (maybe over $2000/oz for gold and $45/oz for silver in the near future). Then again, there is another way to play - shorting Treasury yields (TBT) or the euro (EUO). Can the dollar really stay strong in the long run as U.S. debt climbs and debt problems plague central banks around the globe?