gold remains a store of value after Greek crisis looms

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As the Greek populous awaits a final decision from European financial officials about a crucial aid payment, investors remain focused on the unfolding saga and gold remains well supported.


A little more than a year ago, Greek Prime Minister, George Papandreou, told the world that Greece did not have any financial problems. Soon after that, it transpired that the country was so short of cash, they urgently required financial assistance. A year later the situation in Greece is worse than what it was a year ago, and now Papandreou is fighting for his political career.

Last week the Greek drama held centre stage as financial officials, bankers and politicians all tried to seek a mutually beneficial resolution to the crisis. Investors and traders in every corner of global financial markets kept a very close eye on the on-going crisis.

Although the European Union Economics Commissioner Olli Rehn pledged that Greece would receive a crucial $17 billion aid disbursement from the E.U. and the International Monetary Fund by early July, in time to prevent the nation from running out of cash to pay its creditors, after meeting over the weekend, Eurozone finance ministers failed to come to an agreement. They said they needed to approve tougher austerity measures before a final decision is made on a further 12 billion euros in loans.

On Monday, ministers indicated that the next tranche of EU/IMF aid would be paid by mid-July, allowing Athens to avoid default, but said it was up to Greece to show concrete progress on plans to cut spending, raise taxes and generate other revenue streams first.

"We are waiting for a decision from the Greek parliament. We are calling for not just the government, but the Greek opposition to support the plan," Belgian Finance Minister Didier Reynders said ahead of a second day of meetings in Luxembourg.

"We are increasing the pressure because there are precedents," he said, referring to Greece's not meeting commitments in the past and falsifying statistics. "We have to be sure that everyone is going to support the plan."

On Sunday, Prime Minister George Papandreou said, ""The consequences of a violent bankruptcy or exit from the euro would be immediately catastrophic for households, the banks and the country's credibility."

The 12 billion euro payment is due in July. Without it, Athens has warned that it could default on its debts, an event that could wreak havoc on global markets and threaten other European sovereigns and banks, in particular the ECB, certain French and German banks.

"Greece itself must create the conditions so that the next tranche can be paid out as agreed. That's due in July. It is Greece's responsibility that we're having difficulties now," German Finance Minister Wolfgang Schaeuble said of the next tranche payment.

While it seems likely that Athens will eventually get the next tranche, and a further emergency loan program of around 120 billion euros up to the end of 2014 will also be agreed, regardless of how the situation is resolved, it simply won't solve Greece's problems. Greece has a solvency problem, not a liquidity problem, and with a shrinking GDP there is absolutely no ways that this debt will be settled. Greece is bankrupt and any form of bailout is merely "kicking the can down the road."

It seems most people haven't a clue of what is happening in the global monetary system, nor do they particularly care. They are more interested in watching TV or reading about the latest mindless and meaningless escapade of their favourite actor or actress. These are the people who believe everything their government tells them and consider anyone not agreeing, conspiracy theorist-trouble makers, terrorists or money launderers. And, unfortunately, these are the people who will suffer the most if the current situation results in a total monetary collapse. It certainly won't be the so called elite group, or those who have prepared themselves for a potential meltdown.

Hopefully, we escape what has the potential to be the worst financial disaster in our history, and enter a new phase of prosperity for everyone in the world. But, by evaluating the current events, things do not look all that promising. And, while I have always maintained that I don't believe that we will see doomsday, I have become more skeptical. Only a little more than a year ago, I recall Papandreou telling the world that Greece doesn't have a financial problem. What a joke! To use an analogy, Greece is like a small fracture in one of the struts of some large engineering project. However, a failure of this strut could impact the entire structure. And, a break in one structure could cause a collapse in the entire project. The problem I see is that the various structures - in this case the euro and the US dollar- look as if they have numerous fractures.

There is much confusion today over the role of gold. It is viewed as a commodity, a barbaric relic with no real value, as an investment, and as a position to be traded. But if we set aside these preconceived notions and examine the current fiat monetary system, it is not too difficult to understand why gold and precious metals are resuming their historical role as money the world over.

While gold is a commodity that has multiple industrial uses in the fields of electronics, engineering and medicine to name a few, it is much more than that. Quite simply, gold is money. Throughout history there have been many forms of money, from salt to grain to shells to the fiat (paper) currency that is used today. Most don't stand the test of time. Gold, however, has endured as money for over 3,000 years. This is because it meets all the criteria for money, where others have failed.

To satisfy the functions of money, an item must be a unit of account, a medium of exchange and a store of value. Gold is all of these things; it is durable, portable and divisible. It also has an intrinsic value and, of crucial relevance today, it cannot be created by central banks. Gold is a tangible asset; fiat currency is merely printed paper created by government decree. It is only the promise written on the paper that gives it any value. Paper money is not a store of value; the US dollar has lost over 80% of its value since 1971.

There has never been a fiat currency that has retained any purchasing power for a significant period of time. When Nixon abolished the gold standard in 1971, the price of gold was $42 an ounce. Today it is above $1500 an ounce. Meanwhile, in 1971 a gallon of gasoline (petrol) could have been bought of around $0.30, a new Ford car for around $3000 and an average house in the USA for around $25,000. The massive devaluation of the US dollar has been due to the inflationary effects of the monetary policies of the US government.

Gold is traded around the world. The financial institutions of the world understand gold is money. The daily turnover in gold at the London Bullion Market Association is over $20 billion, but the actual volume traded is estimated at five to seven times that amount. This isn't jewellery being traded, this is money. Central banks hold gold as part of their reserves, they understand gold is money, and since 2009 have become net buyers of gold for the first time in decades.

By looking at the weekly chart of gold from November 2009, it is clear that the price of gold remains in a upward trend, and each time it has corrected, it has subsequently moved to a higher price.

About the author

David Levenstein began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.

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