Gold Heats Up as Athens Burns


". . .investors will likely demand gold with extreme urgency."

In the decades that preceded Greece's adoption of the euro in 2001, the country papered over its chronic inefficiency through regular devaluations of its currency, the drachma. But as a prerequisite to join the eurozone, the dominant powers of the Continent, most notably Germany, required financial housecleaning and promises of fiscal discipline. When these goals were apparently met, the Greeks came aboard.

With the benefit of hindsight, it is now widely understood that Greece, along with some other 'Club Med' countries, 'distorted' its financials (largely through accounting gimmickry dreamed up on Wall Street) to qualify for entry. No doubt the influx of more than 100mn citizens from these countries swelled the economic heft of the eurozone. But these benefits came with a price.

When the world's recession began, countries with the heaviest relative debt loads experienced the unforgiving brutality of reverse leverage. Now that payback time has arrived, not just individuals and corporations, but nations are threatened with default.

Originally, the Greek rescue package was billed at $12bn, then at $30bn, with Germany providing the lion's share.

Wednesday, The Wall Street Journal reported that the rescue package for Greece will total some $133.14 billion over three years. According to IMF estimates, in 2009 the Greek economy accounted for just 2% of the EU's. If the larger economies of Spain, Portugal and Italy need financial bailouts, the sums involved may amount to trillions of dollars.

If the number of countries needing bailouts continues to grow, the amount of new paper money that will likely be issued will skyrocket. Debt ratios of the UK and the U.S. are among the worst in the developed world. Should they require financial rescue, the bill may very well reach tens of trillions of dollars. If that happens investors will likely demand gold with extreme urgency.

Athens and the seats of power of other profligate governments appear ready to crumble under the heat of the political austerity brought on by the threat of financial collapse. As a result, gold seems to be heating up.

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