Uncertainty over Greek bail-out weighs on precious metals

Most precious metals ended the week lower. The only exception was platinum, which gained strongly at the start of the week and managed to defend a major part of the gains at the end of the week. The major factor moving precious metals prices had been the EUR/USD exchange rate, which was following largely the news flow over the Greek bail-out.

Financial markets started disappointed in the trading week after Greece could not announce an agreement with private creditors on the PSI, the hair-cut private bond holders would have to accept. Furthermore, the Greek government and the parties backing the technocratic PM Papademos had not reached an agreement with the troika of IMF, EU and ECB. However, as news pointed towards an agreement being in reach, the euro firmed against the US dollar and pulled also precious metals higher. On Thursday, an agreement within the government and with the troika had been reached a few hours before a meeting of eurozone finance ministers took place. However, led by Germany, the finance ministers rejected the agreement with the troika as insufficient. They demand that Greece would have to save another 345mn euro. Furthermore, all coalition parties would have to sign the agreement. Greece had been set a deadline by Wednesday, February 15, 2012. On Friday, the right-wing party left the coalition government. The Greek parliament will decide on Sunday evening, after this article had been released, on the measures of the bail-out package.

Germany’s stubbornly hard stance is again guided by domestic political considerations and economic stupidity. In speeches on public finances, German chancellor Merkel refers often to the metaphor of the Swabian housewife, which is known as being extremely thrifty. Micheal Lewis noted rightly in his latest book that saving appears to be a virtue in Germany and borrowing as being a deadly sin. Therefore, it comes not as a surprise that supporting the bail-out package for Greece is not popular in opinion polls. Furthermore, the support in Mrs. Merkel’s coalition parties appears to be declining.

Germany’s economic prescription for the healing the Greek debt crisis is like medieval medicals blood-letting. The worse the situation of the patient got, the more blood-letting was ordered by the medicals until the patient died. It is thus no wonder that it was a physician who compared the economy with the blood circulation in the human body (Francois Quesnay in Tableau Economique, published in 1758). The more austerity measures Greece has to implement the more severe the slump in economic activity gets. Measures to reduce the budget deficit by spending cuts and tax hikes have to be compensated by other expansionary measures. However, in the case of Greece, this is not the case.

In Germany, but also in some other so-called stability oriented countries, the belief that a default of Greece and an exit of the eurozone would be contained, is finding more and more supporters. However, also the US administration believed that the bankruptcy of Lehman Brothers would have little impact. As we know, they were completely wrong and it caused a major global financial and economic crisis. If Greece would default in March, the ESM is not ready to work and the EFSF might not have sufficient funds available to prevent a contagion. Financial market would immediately attack Portugal, Ireland, Spain and Italy again. And if the German economic orthodoxy leads to a depression in the eurozone, which would also lead to a global recession, where do they want to export all their goods?

Thus, the further development of precious metals prices depends crucially on avoiding a Greek default and on passing the 130bn euro bail-out package. A default is probably negative for precious metals due to a weaker euro against the US dollar and revived fears of a global recession. However, gold might profit from safe haven buying. However, as the development in 2008 showed, this might only set in after gold also weakened due to liquidations of positions to cover losses and to obtain liquidity.