Greece Exposes Future and Opportunity

By: Neil Charnock | Tue, Mar 23, 2010
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We are looking at a high probability of a rally in the gold price in the coming weeks which will spur gold stocks into upward motion yet again. This is suggested due to fundamental and technical reasons. Inflation (of the money supply), increasing demand and coming uncertainty as the sovereign debt crisis gradually unfolds are three of the key fundamental drivers going forward. The pace of the increase in the money supply is increasing and causing distortions that are essential to understand.

There has been a staggering US$2.59 TRILLION in Treasury Department sales since the beginning of 2009. Spending is still increasing not declining as the US looks to blow-out (easily exceed) its projected deficit of $1.6T. Could we now see a massive new wave of liquidity in the global system in response to national defaults?

When a country becomes insolvent it is not forbidden to continue to trade as companies are here in Australia. I do not know the individual laws around the world on this issue however my point is that a country is vastly different to a bank or company. A country different and an unsustainable deficit and debt is different by magnitude and character to a bank or company insolvency. It is obvious that a country has no choice but to continue to trade.

Countries have mechanisms that can enable it to borrow money offshore and print money if it is no longer unable to borrow. That is unless you are part of a monetary Union like the Euro in which case you have to turn to the other members of your Union or the IMF for help. Outside this experimental Union we are running an experimental unbacked global reserve currency which also seems to be unravelling.

A country outside the EU can print all it likes in theory however if this is done to excess you can eventually end up with a post WW1 Weimar Republic Germany or post WW2 Hungarian hyperinflationary scenario. This is caused by excessive printing of the local currency to a point that all confidence is lost. Confidence in the once mighty USD is waning alarmingly and creating uncertainty at this point in history although it is not a forgone conclusion that it will develop into a full blown hyperinflation.

Markets do not like uncertainty which will be on the increase this year due to debt issues with Portugal, Italy, Greece, Spain, the UK and the USA. There are three major factors you have to get right to make money from such a situation. These are; predicting and timing the gold price movement, selection of the right gold shares and currency movements.

I have been talking about the likelihood of currency fluctuations and upheavals for this year. I still believe this is very important for you to consider and weight in your investment decisions. It will have a strong positive effect on gold in all currencies as central banks and large investors are attracted to gold as a hedge or investment.

I opened 2010 (January 5th Outlook for 2010 and A World First) with a very brave statement; "This year will initially see a continuation of the trends established in 2009. I understand that this seems like a bland statement. The stock market reads future trends and outcomes at times and has factored (government sponsored) growth this year. Thanks to the vast overflow and after effect of the stimulus capital flows this will come to pass initially and therefore I consider that the highest probability is that the stock market rally will continue in the first half."

It looked like I had been wrong after mid January when markets corrected however we have just marked new highs on the all important Dow and it sure looks like I was correct at this stage. The point of telling you this is to give you some measure of confidence that a crash is not imminent. Many investors are perplexed by this situation and know things are not well at all.

The next crash will be different because the nature of sovereign debt is of a different character as stated above. The debt bubble has to pop and the "all is well" can only live in their make believe for so long until the music stops but for now we can make money by investing wisely. We have an insight into the future from what is happening before our very eyes at present so it is important to take notice and observe.

Window (into) the Future

We are seeing very interesting developments in Greece and it must be uncomfortable for the Greek Prime Minister George Papandreou who is (apparently) not going to be bailed out by Germany. This is particularly interesting as it gives us an insight about the same ramifications for other nations with unruly deficits.

The risk premium on Greek 10 year bonds is increasing which does not auger well for the upcoming funding of bond redemptions in April and May. This means that this problem is not going to go away and instead it is highly likely to grow more intense. Greece is recognising that their higher interest rates are unsustainable and are attempting to reduce their deficit to 8.7% from the current rate of 12.7% of GDP.

The real problem is that rising borrowing costs are going to eat away at any gains they make in their quest to repair their national balance sheet and restore growth. Greece has faced two general strikes this year already as the government tries to cut back on spending. Unfortunately growing social pain and unrest is another growing trend as we go forward. This is why we all need to up to speed on Fx (currencies) and the precious metals sector as a way of maintaining our prosperity.

European Central Bank President Jean- Claude Trichet and French President Nicolas Sarkozy are not happy with the PR this Greek situation is concentrating on Europe. They do not like the IMF "bail us out" option being suggested by Mr. Papandreou as they feel it indicates the EU cannot handle its own problems in house.

If anybody thinks that this is an isolated case they had better get up to speed on the growing sovereign debt crisis. This is the future of many nations along a path that will eventually lead back to the mighty USA. The future will feature a rising cost of debt and crowding out as borrowers line up to roll over or secure new debt. This is a credit crisis on a scale the world has not seen and this brings me to the subject of opportunity.

Most people lose money in a bear market however if you keep your nerve and are educated it is the optimum time to make money.

This phase of the global financial crisis is different in many ways. When the manure finally hit the fan last round the banks would not lend to each other and now it is countries instead. Governments bailed out the banks so who bails out the countries if they can't bail out each other? The answer is the IMF which will have to write off some debts and the Central banking system will also print new money like there is no tomorrow.

Gold and Gold Stocks

Gold is going back up once it is ready. I don't care if the gold stocks lead the way this time or not as the fact is that the leverage will be greater for investors who buy the shares. This is right and proper as you therefore take on risk whereas the metal carries virtually none.

I am preparing a new company report as an educational piece on how to spot, time and value a recovery gold stock investment. I have sought and gained approval from the company which clears the way. The last two reports have been screaming successes and I thank those who sent the feedback as well as those investors that benefited as it is a pleasure to serve you and the companies by writing about their story.

The whole gold sector Down Under is about half price on average compared to pre-crash levels even with a currently high Australian dollar. We currently have a AUD$1200 gold price which is highly profitable for the lower to medium cost producers. The exciting thing is that we now have limited down side and significant upside for the sector.

Gold and key energy stocks are just two ways to benefit from understanding a bear market. Cash will become such an important investment class at the right time as it will rise in value against general stocks, bonds and property faster than most investors can imagine. Take some time to understand what happened to property values in Japan and recently in the USA. We will be covering education on these topics in the GoldOz Gold Members area on this more as time moves on.

For now if you are in property (apart from for your own use) you should be looking at Japan as your model and adding higher interest rates into your modelling. If you cannot imagine interest rates over 15% ever again then consider we are looking at years of higher interest rates ahead (slowly at first like all bull markets). Imagine you have $2B and are considering a bond purchase from a government that cannot keep its financial matters in order - what risk factor would you need to be enticed to invest under these circumstances. Look at Greece and their recent markedly higher interest rate experience and "smell the roses".

If you think we did OK in Australia during phase one of the GFC then imagine a new and different phase that includes very high interest rates for all the wrong reasons. The wrong reasons will include fear, risk and uncertainty. You want to be in the right position when all this peaks and it will so it will really help if you understand Fx, interest rates, debt cycles and how to invest in the right stocks.

For now I am concentrating on gaining benefit from this current market opportunity for my Members via articles, site content, comparison products and special reports. You are welcome to join if interested we are growing rapidly. Remember that some of the biggest and most influential funds in the world are investing Down Under in this gold sector.

Good trading / investing.



Neil Charnock

Author: Neil Charnock

Neil Charnock

GoldOz offers major points of difference to many services. We offer education for all levels of investors including a Newsletter, gold stock comparison tool, an educational portfolio and a running commentary on the gold sector. We have expertise in debt markets and gold equities which gives us a strong edge as independent analysts and market commentators. GoldOz also has free access area on the history of gold, links to Australian gold stocks and miners plus many other resources.

Neil Charnock is not a registered investment advisor. He is an experienced private investor who, in addition to his essay publication offerings, has now assembled a highly experienced panel to assist in the presentation of various research information services. The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are his current opinion only, further more conditions may cause these opinions to change without notice. The insights herein published are made solely for international and educational purposes. The contents in this publication are not to be construed as solicitation or recommendation to be used for formulation of investment decisions in any type of market whatsoever. WARNING share market investment or speculation is a high risk activity. Investors enter such activity at their own risk and must conduct their own due diligence to research and verify all aspects of any investment decision, if necessary seeking competent professional assistance.

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