The Gold futures spot price is consolidating at $1,200/oz after a very strong rally this week with a major move on Wednesday to close at $1,202, up over $25 on heavy volume to close the week at $1999.97. As we commented last week, gold prices have been making a series of higher highs and higher lows. This reflects some seasonal strength as June and July are typically strong months for gold and silver prices.
Strength in gold and silver in prices also triggered short covering, with fresh speculator buying and safe haven demand. Given the geopolitical situation with Russia and the financial crisis in Greece (more about this below) the argument for safe haven demand has merit. Dovish remarks on interest rates from the Fed Chair Janet Yellen after the Fed meeting this week may have been the spark that ignited this solid rally in gold prices.
Unusual Action in the Silver Market
In the second week of June, some 15% of the world’s annual production of silver was sold short on the COMEX. This is tremendously bullish in the near term for silver. This market action propelled open interest in COMEX silver to record levels of over 190,000 contracts, representing 960 million ounces of silver. This contract exposure is ten per cent greater than the annual global production of silver. With silver prices below the average cost of mining, declining above ground inventories and significantly increased industrial demand from the solar power industry, this near term artificial price suppression points to a major move up for silver. The fundamental reasons for owning silver have never been better.
Greek Bank Runs and Pending Default
Depositors in Greek banks are withdrawing funds at an unprecedented rate. Through Thursday this week, over €3 billion has been bled from the Greek banking system. To cover this liquidity crisis, the Greek Central Bank requested an emergency cash injection from the European Central Bank (ECB) to prevent inevitable insolvency of the banking system. The ECB granted €1.1 billion in emergency credit expansion, adding more debt fuel to the already hopeless Greek economic meltdown. Then on Friday, according to Reuters, Greek depositors withdrew €1.2 billion in cash, consuming the emergency liquidity assistance entirely, in one day!
Greece is being isolated by the international financial community in anticipation of the government debt default and bank failures that will follow. For example: Trading in the Greek 5 year bond has halted entirely. Not one Greek 5 year bond has traded since April 24th and no Greek government bonds have traded since May 20th. The major US banks and brokerage firms have informed customers that they will no longer guarantee settlement of trades in Greek equities, customers must make their own arrangements for cash settlement.
At this writing, the Greek bank run continues with long lines at ATMs in Athens.
Why a Greek Debt Default Matters to You
Friday, the prime minister of Greece is meeting with Vladimir Putin to discuss the terms of a Russian Federation loan to Greece. Greece as you know is a key member of NATO. It is very much in Putin’s interest to fund a needy NATO country with a strategic warm water port. At a time when the US and Europe have imposed severe economic and political sanctions on Russia and Belgium has frozen Russian assets- would such a loan compromise the strategic interests of an important NATO country? Will this further destabilize an already fractured NATO alliance in the face of a determined Russia?
Geopolitical instability has traditionally fueled safe haven buying of gold and we have already seen significant increases in gold purchases in all of the countries of the EU this year. German banks have enormous exposure to Greek debt and the German people have led the EU in safe haven buying of gold.
If Greece defaults with finality and again repudiates (“but this time we really mean it”) their debt to the IMF, as they have done already in an official public statement from The Ministry of Finance; most analysts are predicting the exit of Greece from the Euro and the European Central Bank system. This exit, it is understood will collapse the Euro as a viable currency since both France and Spain will likely follow with popular political support to quit the Euro as an alternative to paying their national debt to the ECB and IMF.
However, even if the ECB and the IMF absorb losses of 50% of the Greek debt as Greece is demanding, this will destroy the multi trillion Euro interest rate swaps (derivatives) market and create a Lehman Brothers type failure at Deutsche Bank- the fourth largest bank in the world with derivatives exposure in excess of $54 Trillion. Yes, that’s Trillion with a “T”.
Should this happen, we will see rampant inflation overnight in the EU. In the event that the ECB and IMF reach an agreement with Greece to refinance and or forgive some portion of their debt, we will see inflation occur over a matter of weeks and months. Either outcome will drive gold demand and prices higher.
Owning gold at this point in time is “Heads I win, tails I win.” regardless of the outcome in Europe.
Texas is Taking Their Gold and Going Home
Texas Governor Greg Abbott signed a bill into law on Friday, June 12, that will allow Texas to build a gold and silver bullion depository. Texas will withdraw its gold from the New York Federal Reserve Bank and store it in the new bullion vault when completed. The bill also contains a provision to prevent federal confiscation of gold bullion owned by private parties via the Gold Confiscation Act of 1933. Section A2116.023 of the Texas bill states: “A purported confiscation, requisition, seizure, or other attempt to control the ownership … is void ab initio and of no force or effect.”
Find out why this bullion anti- confiscation provision is considered crucial for the citizens and State of Texas and for you and I. Call one of our precious metals experts today.