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« Greek Austerity for European Aid | Main | Fronteer Developments Group: Sold our Holdings »

The Euro Is Screwed

Gold Prices in EUR oz 02 May 2010.jpg

By Kevin Brekke and David Galland, The Casey Report

On April 22, Eurostat, the statistical arm of the European Union, released figures on EU member states’ government deficits and debt for 2006-2009. The European Commission requires member states to report certain data every April.

The timing of the report’s release could not be more problematic for Greece, which has been in discussions with the IMF and other EU states over possible bailout assistance. In a note to the report, Eurostat expressed reservations about Greece’s accuracy in its numbers from last year, saying:

Eurostat is expressing a reservation on the quality of the data reported by Greece, due to uncertainties on the surplus of social security funds for 2009, on the classification of some public entities and on the recording of off-market swaps. Following completion of the investigations that Eurostat is undertaking on these issues in cooperation with the Greek Statistical Authorities, this could lead to a revision for the year 2009 of the order of 0.3 to 0.5 percentage points of GDP for the deficit and 5 to 7 percentage points of GDP for the debt. [emphasis mine]

If these “reservations” prove correct, it will catapult Greece into the debt-to-GDP leader at 122.1%, leap-frogging Italy, which is currently at 115.8%.

But perhaps most telling is the report’s title, “Euro area and EU27 government deficit at 6.3% and 6.8% of GDP, respectively.” Recall that the EU’s Stability and Growth Pact mandates a budget deficit ceiling of 3.0%, and we see that the 16 euro area members are, in aggregate, in gross violation of the pact. Even more alarming is the rate of change in the aggregate budget deficit figure from 2008 to 2009, growing 230%.

And lastly, the aggregate euro area debt-to-GDP ratio climbed from 66.0% in 2007 to 78.7% in 2009, a stunning rise. If this annual rate of growth continues, the euro area debt-to-GDP ratio will zoom past 100% in two years, a level at which many think it begins to exert significant strain on fiscal budgets and spending.

The report, on the whole, paints a picture of an experiment in currency sharing and cross-border “normalization” of fiscal order that has gone terribly wrong. The old saying that a camel is a horse designed by committee seems to be underway here. It will be amusing to watch into what sort of “animal” the EU morphs in the coming years.

As one would expect on reading news that is less than cheery for the eurozone, the U.S. dollar has been moving up, sending gold lower. So, perversely, you have gold and the euro moving together.

While the current rebound in the dollar may be discomfiting to some gold investors, especially in that gold has been facing headwinds again, in our scenario of a broad-based crisis in the global fiat currencies, the major currencies will come under pressure individually before coming under pressure collectively.

Today, safe-haven seekers reflexively run from the euro to the U.S. dollar, which in turn sends a signal to the trading community to sell gold for no better reason than the historical inverse connection between the dollar and gold. This is only temporary, as you can see in the following chart plotting the euro against gold over the last troubled year.

This is all just part and parcel of the secular trend that will lead to the end of the fiat currency experiment as the world wakes up to the full implications of the institutionalized monetary abuse engendered by a fiat system. As is so clearly evidenced in the drama now playing out in Greece, when a government is forced to solve its debt problem by issuing more debt, the end is nigh.

With the global economy still in the tank, concurrently layering on yet more taxes in order to try and keep the whole mountain of cards from blowing its top like Iceland’s Eyjafjallajökull* volcano will only prove counterproductive in the extreme.

This is no time to be complacent, or cavalier, about your financial affairs. Now is the time to be both cautious and, selectively, opportunistic. Because along with risk, big market moves also bring big opportunities.

And analyzing imminent, big market moves is the forte of David Galland, Doug Casey, and the other editors of The Casey Report. Every month, they investigate economic trends in the making and find the best investment opportunities arising from them. Learn more about their accurate predictions and how you can profit – click here.

Got a comment then please add it to this article, all opinions are welcome and

As a suggestion for those who do want leverage to the precious metals bull, the gold and silver funds together with the careful application of options trades could be a possible solution for you. This way we are exposed to any movement in gold prices which in turn is magnified by the effect of the option. Do remember that loses are also magnified in the same way so its not a strategy for the faint hearted. On the other hand the quality stocks are not performing as anticipated and a non-producing junior stock is a shot in the dark, however, its your money and its your call.

If you would like to get a bit more bang out of your buck, then check out our Options Trading Service please click here.

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Reader Comments (10)

Good morning gentlemen. Not a surprise to hear things are worse in the Eurozone than Mass Media depicts. And so it goes here too in the never-to-change AAA-rated good ol' USA. Thanks to Mass Media painting a rosy picture, a whole lot of Americans are gunna be real surprised what's coming up the pike here in the coming few years. Prepare individually for that time or ignore and go on with business-as-usual at one's peril. The vast majority of people seem to be choosing the latter from my view.

Did you see the highlights of the hearing on Capital Hill with the GS traders? It was a snapshot of the way Wall Street thinks about business-as-usual. Not an iota of remorse or sense of responsibility to those of us on Main Street.

The sh*t storm is coming. Time to stack some more silver. And add a few cans of beans to the pantry.

Have a good weekend.

May 2, 2010 | Unregistered CommenterSnakeman

122% is nothing. look at japan , 200% on the second place just after Zimbabwe. and the US with only 80% ?, dollar rally temporary?, ohh boy, we can see the USD index at 115 easily with this global mess, and gold below 500. it is not the question of "if" , it is a question of "when"

May 2, 2010 | Unregistered CommenterDi

DREAM ON, in the world does a weak Euro make the dollar stronger? Gold below 500, what are you smoking?

May 2, 2010 | Unregistered CommenterSnakeman

Come on with the answer to my first question, Di...

Rotten Apples don't make rotten oranges taste any better. They just LOOK better.

May 2, 2010 | Unregistered CommenterSnakeman

This article depicts a situation that is dire for fiat currencies. But it would be ludicrous to suggest that gold and precious metals can replace those currencies no matter how bad governments that issue those currencies behave. There is simply not enough of that stuff to support a global economy on such a grand scale. I challenge those gold backers to show a viable plan in how gold would replace those evil fiat currencies. C'mon guys. Do you expect sensible people to take you seriously?

May 3, 2010 | Unregistered Commenterphilico

Why are any EU countries spending more than they take in? Are they at war? Are they rebuilding after an earthquake? IMO there should be no deficit spending at all over there (or here!).
(Don't worry I'm not that naive!)

May 3, 2010 | Unregistered CommenterOwen

In answer to Philico, you are correct if the fractional scams of modern day finances continue (ie bank takes in $1 and lends out $10, $1 to each of 10 people)....and of course physical metals can't be transmitted electronically.....but the physical metals can bring back a monolithic level of honesty to trade which is clearly lacking now....sure re-evaluating physical metals to their true values of say $10K/oz gold and $700/oz silver (the original 1:16 ratio) won't be the answer to ALL financial transactions, but it will eliminate many of the failures of fiat currencies.

May 3, 2010 | Unregistered CommenterSnakeman

Bang on!

But we would also need honest politicians/administrators who wont lie about the quantity of gold that they have and have an independent method of auditing exactly what is in the vault, no leasing or lending, etc, its got to be tightly controlled.

May 3, 2010 | Unregistered CommenterGold Prices

Indeed the 'weak link" in many systems..."honest poli's and administrators"...that indeed will need to be worked the meantime build up your own stash of physical because you will personally prepare for whatever happens, look out for yourself...the rest will have to be worked out...

May 3, 2010 | Unregistered CommenterSnakeman

A snip from John Nadler on Kitco:

Mr. Crook argued that once the current crisis is over and gold starts to reflect its ‘fair, adjusted for monetary policy (post liquidity extraction) price.’ That price is about $800 per ounce in Mr. Crooks’ opinion. Yes, not the $7,000 per ounce price was offered last week by one of its rip-roaringly perma-bullish guests. Mr. Crook is thus shorting the GLD. Period. Buying Jan. 2012 puts, to be precise. He also sees platinum and palladium (bullion and ETFs) as the ‘winners for the next decade.’

May 3, 2010 | Unregistered CommenterGold Prices

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