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Is There a Silver Lining in Europe’s Greek Tragedy?

By: Vincenzo Desroches

-- Posted 12 May, 2010 | | Discuss This Article - Comments:

Greece and the Euro Zone are still very much in the midst of a debt and deficit crisis that represents the first real test of their Euro-based infrastructure in over a decade.  The current malaise appears to be contagious as most experts agree that Spain and Portugal are also at risk of being swept up in the maelstrom.  The impact on global trading markets has been instantaneous.  Tension and uncertainty has a way of waking up idle investors, along with eager speculators searching for arbitrage opportunities.  Economists are checking their long-term fundamentals and making revisions, while industry pundits look for silver linings in this unprecedented meltdown.


Optimism abounds in surveys taken in the European business community, suggesting that sentiments favor an increase in demand for exports that a weakened Euro might generate.  However, economic recoveries take time, and the type of real cures for the problems at hand are structural in nature.  European liberal policies may have to moderate and adopt changes that resemble more Western views.  If those countries are to improve their finances and protect themselves against the threat of future crises, they will essentially need to cut debt and structural deficits, tighten government spending, overhaul their state pension systems and labor policies, raise the retirement age, improve tax collection, and generally follow a more U.S.-style neo-liberal economic model.  A conservative wave of reform is likely in forthcoming elections.


Traders of all types, whether in precious metals or foreign currencies, have raced to their trading desks with their respective commodity or forex charts in hand.  International crises always create volatility in global markets, and volatility is the harbinger of opportunities to profit from uncertainty.  The true silver lining in these events has been a predictable flight of capital to precious metals and currencies perceived as safe havens from which to ride out the storm.  Gold and Silver have hit season highs, well above peaks not seen since last December, while the U.S. Dollar strengthened when nothing fundamentally has changed related to national debt or deficits.  We live in strange times where rules are being re-written regarding basic market principles.


Those, who cover the precious metals market, have for sometime made note of the correlation between metals and stocks in general.  As stocks rise, metals follow suit.  Gold has broken out of this correlation occasionally, but silver tends to have more industrial uses than gold, thereby suggesting a trending more in line with industrial stocks.  These same experts are now saying that metals have severed this linkage and can only move higher in the months to come.  Momentum indicators for metals seem to support this logic, although stocks did rebound this week from last week’s plunge.  Similar momentum indicators for stocks, however, suggest that an overbought condition exists and has existed for some time.  While the expected market correction in stock values dissipated, most believe the inevitable downturn is waiting until the end of the month.


In the meantime, gold and silver are both appreciating, much to the consternation of traditional value investors.  The Dollar has also strengthened, but not to the degree of the precious metal sector, and issues in Europe have not gone away, even though leaders of the Euro Zone have agreed to extend bailout funds to debt-laden Greece.  Skepticism by investors has still forced the Euro down to new lows versus the Dollar.  The question for precious metal fans is where do we go from here?


In times of crisis, there will always be a flight to safety, as witnessed in the past few days of trading.  Some experts believe that nearly 10%, twice for gold, of the current rise in prices for precious metals is purely speculation and will work its way out over the short-term.  Favorable economic data released on Friday have also bolstered economic fundamentals for the greenback, but there is a long way to go on that score.  Most expect issues in Europe to persist, and these concerns would keep the glow on precious metals as a safe asset in times of financial stress.  Recent highs in both gold and silver attest to this expectation.


There is a silver lining in the storm clouds above us, as far as precious metals are concerned.  As with any crisis of international proportion, the gleam will fade over time until the next crisis comes down the pike to provide polish once again.  Shrinking mine production and expanding demand from the likes of India and China provide the positive fundamentals for long-term optimism in metals.  There remain a few naysayers who claim that a bubble has formed, but bubbles generally are not isolated events.  To the contrary, the apparent support of metals after a dive in stock values is confirmation that a healthy subset of investors regards precious metals as currencies in their own right.


Vincenzo Desroches

-- Posted 12 May, 2010 | | Discuss This Article - Comments:

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