European Union Destined to Collapse

Good morning folks,

I was just reading John Mauldin’s latest newsletter which was focused this week on the fiscal crisis in Greece. While it’s been in the news a lot over the past few months, this edition solidified my belief that the EU will not survive this attack on the core of the union itself.He brought to light the lying the Greece did in order to get into the Union and how the other European countries are invariably tied to one other by owning each other’s debt. Germany and France, in that order, are by far the largest players and it will be up them to determine the future of the Euro.

John provided the following information which The Frankfurter Allgemeine Zeitung in a front page editorial warned the [German] chancellor yesterday that offering Greece any kind of bailout would be a betrayal of the trust of the Germans who so reluctantly traded in their marks for the euro. "If the no-bailout clause of the Maastricht Treaty is going to be abandoned, then the last anchor of a stable euro will be destroyed."

This is an ominous warning if I ever saw one. There are not many options left for any of the players and the best option over the long run for the largest players is to bail out Greece and then kick them out of the European Union. As many economists keep pointing out, Ireland, Italy, Portugal and Spain are all in trouble as well. If Greece is not bailed out then France, Switzerland and Belgium will also be added the trouble list as they hold enormous amounts of Greek debt. Germany too holds a large amount but their economy could sustain ONE hit. It’s the second failure that will be disastrous to Germany. As pointed out by the Frankfurter Allgemeine Zeitungabove, the German chancellor is risking political suicide if she opts to allow the bailout of Greece.

The result of either option taken by Chancellor Merkel is that the Euro will most likely have to be reshaped or withdrawn as a currency. It is my personal opinion that the German’s will try to find a way out of the Euro and return to their own fiscal prudence. They are a very strong country and cannot endure the incompetence of governments like those in Greece.

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Gold - $800 or $5000

Over the past month, there has been a lot of speculation about where the short term price of gold is headed. Countries holding huge amounts of foreign treasuries, like China and Russia, would love to see a decline back to the $800 level as that would allow them to significantly increase their gold holdings. Therein lays the crux for them. As the price declines, they will use the lower price to increase holdings, and the very act of doing so will support the price. Do they have the wherewithal to resist buying in hopes of a further price decline?

In November 2009, India bought 200 tons of gold from the International Monetary Fund at an average price of $1045/ounce. Look for India to use that price as the lowest they will allow the price before they continue buying. They will do so because historically, they have held nearly 20% of their foreign reserves in gold, yet right now they only have around 4% with the bulk being in US Dollars. As the Dollar strengthens on Euro weakness, look for the Indians to sell Dollars on strength and buy more gold.

I don’t see the gold price dipping below $1000 primarily because of the desire of India and China to diversify their Dollar holdings but also because the growing number of private individuals looking to own physical gold. The Euro crisis just heightens the global awareness of the financial situation that the developed countries are now facing.

Renewed strength in the US Dollar is not a result of improving fundamentals so don’t be fooled. The American debt situation continues to worsen and universal health care proposal that President Obama is pushing will only add to that debt. The strength in the dollar is a result of the movement of money from Euros to US Treasuries which some see as safer, but over the longer term, I believe you will see much of that money move out of US Treasuries and into gold when the focus returns to America’s own debt crisis. When this happens, we could very well see gold hit $5000. I wouldn’t hold your breath on this one. This could still be 5 – 7 years out, but the long term trend is definitely UP!

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Mexican Mining

Mexico is renowned for its mining community, particularly for its gold and silver mines. Over the past couple of years, the Mexican authorities have allowed their entire mining industry to fall into a perilous state because of a tiny rogue company. This company, Minera San Jorge, S.A. de C.V. , held ownership of a mining property and optioned it to another company, Bandera Gold, with requirements for Bandera to develop the property. After meeting the obligations, Minera tried to pull the plug on the deal and claim there was no deal. A lawsuit followed with Minera not even showing up at the trial on several occasions, and essentially providing no case. Bandera was victorious but Minera appealed and the case drags on.

Why is this important? Many Canadian and American mining companies operate mines and explore in Mexico for new sources of minerals. They usually require Mexican partners to do preliminary scoping studies and of course have to buy or opt in to properties that are owned by Mexicans. If Mexican landowners do not have to abide by the rule of law then all future mining deals, regardless of size, are in question.

In Canada, while the right to appeal exists, the appeal court would quickly decide whether or not there is validity, rather than hold up capital assets. The Mexican courts have been dealing with this one for over two years and may have been trying to bankrupt Bandera, but the company recently refinanced with a private placement so they have new life and have refocused OUTSIDE of Mexico.

If the Mexican courts award judgment in favor of Minera, look for an exodus of capital from Mexican mining operations.

I am an ECU shareholder and invite comments.

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Excerpts above were from the MARKET NAVIGATOR.