Greece Will Default & Gold Will Vault

WHY ARE THE GREEKS PROTESTING?

The Greeks are protesting on the streets because they can smell a rat before they even see it. Their instinct tells them that the fine detail of the austerity measures will inevitably lead to incredible hardship, belt tightening and long term debt servitude. Their sovereignty and hence their freedom and future will be greatly restricted.

Moreover they realise that the rescue package is nothing more than a belated attempt by the strong men of Europe and the IMF to save the collective bacon of the other "PIIGS" rather than to bring Greece back from the edge of the abyss. In fact Greece would have been cut loose had it not been for its potential to contaminate the whole system.

They also understand that if the assistance package fails it could nevertheless leave them with even more debt and potentially much more damage if they were to default.

The populace at large feels that by precipitating a debt default across Europe, Greece will cease to be the focus of attention given that the outstanding debt of Spain, Italy and Ireland is a far more menacing threat to international creditors and the banking system.

Make no mistake, the Greeks know and accept that they have created their own ruin, but at the same time, the international community that extended credit over the last 10 years did not exactly carry out a process of due diligence on the borrower in the first place. Had it done so, it is highly unlikely that credit would have been extended on terms and in amounts we have witnessed. One should also not omit to mention that the "supervisory" ineptitude of the EU was matched by the third rate data collection and first rate dishonesty of the Greek government.

In brief, the Greeks will prefer the shorter term agony of default rather than the discomfort of longer term discipline. In fact, default may leave Greece in a better position in the long term providing it does not succumb again to unfunded government and private largesse.

If continuing agitation, demonstrations and strikes by Greek workers make the austerity measures unenforceable then continuing financial support will not be possible and the game will be up for all of Europe as dominoes start to fall in quick succession.

WHAT FOLLWS DEFAULT?

At worst, Greece will be forced to cut down on its consumption of overseas goods and services or else it will have to pay "cash on delivery". Cash on delivery could well mean gold as nations cease to accept worthless paper as payment. Alternatively it will have to pledge or sell real assets (such as uninhabited islands or certain industries). Clearly there are limitations to such a course of action and sooner or later it will have to live within its means.

The timetable for a normalised economy would be much shorter for an economy that defaults than for one that is faced with the uncertainty of a multi-year austerity program.

Make no mistake, the demand for gold as payment or security will take on greater and greater prominence and significance in the ensuing future. Islands, buildings and even industries are difficult to convert into an internationally accepted currency and in most cases are not pragmatic outcomes for trade creditors no matter where they are located.

For everyday transactions, silver will reign as the currency of choice for practical and other reasons.

Nations will no longer extend credit to the extent they have done so in the past. Surpluses will be invested internally to a far greater extent or else hard assets will be bought overseas where the political climate allows. When Argentina defaulted a decade ago, it caused 20% of the Italian pension system to disappear as a result of bond losses.

WHAT ARE GREECE'S CHANCES OF SUCCEEDING?

The very slight chance that Greece will be able to succeed in imposing the austerity measures as well as achieving budget outcomes is dependent on it being able to achieve all of the measures relating to expenditure cuts, tax increases, curbing tax evasion, reducing benefits for public sector employees and pensioners and making the necessary structural changes. Historically ingrained attitudes, the extent of the debt, the little time afforded to Greece as well as the general international downturn make such an outcome very difficult.

I suspect that Europe knows and understands this, and perhaps is extending this 3 year package of assistance knowing full well that it will withdraw it as soon as Greece stumbles whilst giving the rest of Europe time to plan and prepare for the inevitable failure of Greece and possibly others.

GOLD IS THE ONLY REAL FINANCIAL DENOMINATOR

Gold has returned and it is exposing the fraudulent nature of stock market indices. On December 31, 2009 for instance, the DAX stood at 5957 whilst gold was priced at 765 Euros. In other words, 7.78 oz of gold were needed to buy the DAX. On May 5, 2010, the DAX closed at 5957 which would indicate that the stock market is holding up well in the middle of the Greek crisis. What the reader needs to keep in mind, however, is that for the DAX to have kept abreast of the gold price (at 909 Euros), it would now have to be 7,072. The reality is that the DAX has in fact lost serious value in real terms.

The U.S. market should take little comfort in these developments. The Euro may be under threat but in the meantime its sharp reversal against the US dollar (and the Yuan) is having the two-fold effect of giving European exporters a competitive advantage as well as weakening the argument about China being a currency manipulator.

The USA has so far delayed (but not avoided) an implosion through the use and abuse of quantitative easing (money printing) which the Europeans are yet to resort to. The USA however cannot outrun or hide from its unsustainable budgetary and debt trajectories.

THE DATE OF THE COLLAPSE

A date cannot be given for the day that the whole debt pyramid will be razed to the ground as nations are capable of extraordinary measures in trying to win a few extra breaths. What is certain is that default will become either inevitable or attractive for a number of nations racked by debt.

In the days ahead one should not be surprised if Greek police take greater measures in bringing rioters under control. Buttons are being pressed as we speak and toes are being trodden on for action to be taken.

THE PRICE FOR IGNORING HISTORY

I am always in danger of repeating myself ad nauseam, but the reality is that the debt racked currencies of the USA and Europe will leave their owners financially and psychologically gutted when the general public realizes the nature of the deceit being perpetrated by money printing, income re-distribution through suppressed interest rates and government largesse at the expense of future generations. Europeans and Americans that fail to protect their portfolios through gold and silver are going to wake up to the realization that history does in fact repeat itself.....I guess some lessons can only be learned the hard way.

Sydney Australia