Helping Thy Neighbor; Germany Demands Gold

gold bullionHere’s the bottom line on the crisis in Europe:

The only way the European debt crisis could be put temporarily aside is if the European Central Bank (the “ECB,” our equivalent of the Federal Reserve) prints money. Since Germany is the main voice within the ECB, printing is not the solution, because Germany is refusing outright. This means the European debt crisis continues to escalate on a daily basis.

The German Council of Economic Experts has developed a creative way around the European debt crisis. They call their proposal the “European Redemption Pact” (source: The Telegraph, May 29, 2012).

Under the proposal, a certain percentage of a troubled eurozone country’s public debt would qualify to be placed in a special fund. From this fund, Germany would issue joint debt, so that the country would enjoy the low interest rates paid by the stronger northern countries of the European Union.

To back this debt, Germany is asking that these countries put up 20% collateral. The concept, dear reader, is similar to that of a bank; they will be more than happy to provide you with a loan if you have assets they can seize, just in case you don’t pay.

The assets Germany wants from these countries is either their foreign currency reserves—like U.S. Treasuries or gold bullion.

Now, this is not the first time that stronger eurozone countries have offered to help countries like Greece, Spain and Italy during the European debt crisis. China and Britain offered to provide money to these countries in exchange for their gold bullion. These countries flat out refused, opting instead to hold onto their gold bullion.

This solution will most likely not work, because these countries will not part with their gold bullion. But the fact that it is being proposed proves that gold bullion is money.

The countries in distress in this European debt crisis have some of the largest reserves of gold bullion in the world. I’ve been documenting China’s thirst for gold bullion, so it comes as no surprise that China offered to help these troubled eurozone countries for their gold bullion.

Imagine how desperate these countries are to rid themselves of their debt…but not at the cost of parting with their gold bullion!

The reason they won’t sell their gold bullion is because they understand the value of gold bullion, which has stood the test of time for 5,000 years. And the reason Germany purposed this offer is because it recognizes the value of gold bullion.

The reason Britain and China were willing to help these troubled countries is because they too recognize the value of gold bullion.

There are those who dismiss gold bullion as nothing but a useless metal. However, when it comes to issues of money, gold bullion is part of the agreements and reserves of countries around the world. (See: Central Banks Buy Another 70.3 Tonnes of Gold Bullion in April.)

I have been saying for weeks that the depressed stock prices of senior gold producers present investors with a great opportunity. That opinion remains unchanged.

Michael’s Personal Notes:

Spain’s third largest bank, Bankia, was declared fine just a month ago…

But, in mid-May, it was revealed that Bankia required a €4.1-billion government bailout. By the end of May, the government bailout required to help Bankia hit €23 billion (source: Telegraph, May 28, 2012).

Spain’s Orderly Bank is the country’s government bailout arm to manage all of the banks in Spain. It has only €5.3 billion allocated for government bailouts. So where does Spain get the money for the government bailout when the government has none?

Spain will have to try the debt market. Unfortunately, the debt market is well aware of Spain’s credit crisis and has sent interest rates that Spain now needs to pay on new debt back up to extremely high levels that the country can’t afford: 6.60% and climbing!

As I’ve written recently in these pages, Spain is experiencing its own version of a housing crash, on a larger scale. Property prices are estimated to drop at least another 20% due to staggering unemployment and the continued recession, further exacerbating the credit crisis, which is why a government bailout is a certainty.

The Centre for European Policy Studies in Brussels estimates that the Spanish banks would have to write off at least €270 billion in mortgage debt. There is no government bailout large enough to make up for this loss should it come to be!

It is critical to note, dear reader, that Spain’s two largest banks hold assets (debt and the country’s other loans on top of who knows what else) that are larger than Spain’s gross domestic product (source: Egan-Jones)!

What does this mean? It means the government of Spain has no money to provide a government bailout for the banks!

With the Spanish economy shrinking, unemployment at 24.4% and the housing market collapsing, the credit crisis worsens, because the banks’ “assets” are worth less and less with each passing day.

The people of Spain understand they are in a credit crisis and are moving their money out of Spanish banks and sending it to Germany or other northern European banks in order to protect themselves. What can be referred to as a “bank run” is occurring today, but on a small scale, at least for now.

This makes the situation for the Spanish banks even worse and ensures that the government bailout they are going to need will be large.

The situation has become so dire that this week the European Commission suggested a euro aid for troubled banks. Instead of funneling the money into the Spanish government, send it straight to the banks that need it instead, providing the government bailout the Spanish bank can’t.

However, Germany, Finland and the Netherlands are opposed to such direct government bailouts. So the stalemate continues, as Spain implodes. (See: A Problem Seven Times Bigger Than Greece.)

For the European Commission to suggest something like this means they know how dire the credit crisis has gotten in Spain. Something will have to be done soon, because if they allow even one bank to go bankrupt, the consequences will have global implications.

Financial institutions are connected worldwide. If banking institutions fail in Europe, it will have serious implications for the big banks here in the U.S.

Where the Market Stands; Where it’s Headed:

The official numbers are in: the Dow Jones Industrial Average lost 945 points in May, the equivalent of 7.1%.

What happens next?

More investors flock to the “security” of U.S. Treasuries, as they finally realize that the various recessions in Europe will affect the S&P 500 companies (40% of which have revenue streams in Europe), and China and the U.S. economy are slowing. The Fed gets ready for a third round of quantitative easing (QE3)…but it’s not enough to stop the bear market rally that started in March of 2009 from ending.

What He Said:

“If I had to pick one stock exchange that would rank as the best performer of 2007, it would be the TSX (Canada’s equivalent of the NYSE). Interest rates in Canada remain very low and they are not expected to rise anytime soon. Americans looking to diversify their portfolios, both as a hedge against the U.S. dollar and a play on gold bullion’s price rise, should consider the TSX. Most brokers in the U.S. can buy stock on this exchange.” Michael Lombardi in PROFIT CONFIDENTIAL, February 8, 2007. The TSX was one of the top-performing stock markets in 2007, up just under 20% for the year.