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Anti-German backlash could boost gold and silver

German arrogance that it has the only solution to the Eurozone crisis could misfire and precipitate break-up with uncertainty boosting gold and silver prices.

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LONDON -

With European leaders pontificating in Davos one cannot see that anything positive has come out of the rhetoric - indeed a proposal that an EU Commissioner should be designated to oversee Greece's finances, seen as an attempt to impose a Germanic solution on the Greeks, could well have a strongly adverse effect on near term Eurozone deliberations. While a number of countries within the EC may pay lip service to welcoming it as a pathway to full political and financial integration, when it comes to the crunch the idea of German domination over countries, many of which, in effect, suffered under the Axis Powers in World War 2 does not sit kindly with the populace. If Germany pushes its agenda too far it won't be just Greece that rebels against it.

Even the citizens of a supportive country like France under President Sarkozy - perhaps the main initial driver of the EC - will almost certainly flinch at the idea of being dominated financially and politically by its northern neighbour. The wounds of two world wars run deep in the French psyche - as they do in Belgium, Denmark, Greece, the Netherlands, Poland and others who suffered under the German yoke only a few decades ago. Presidential elections in France due this year may bring this to a head with Sarkozy's apparent pro-German stance perhaps being an election liability.

The trouble is that Germany under Angela Merkel is adamant that it has the only solution and that under its financial dominance the profligate Mediterranean countries which have laxer controls - and perhaps, in their eyes a less efficient work ethic - could be set on the straight and narrow. However what Germany does not seem to take into account is that perhaps its own better financial performance is actually in a large part due to these less well-performing nations which effectively keep the Euro undervalued and hence help keep Germany's export sector competitive in the global marketplace.

Germany's position is perceived by many as arrogant and one cannot see the Greek, or Italian, or even the French people accepting the degree of German control over their systems that the Germans seem to require. This makes a Greek default, and eventual withdrawal from the common currency, even more likely. If Greece withdraws and is seen to be able to do so without cataclysmic consequences then there has to be the likelihood that one of the larger Eurozone countries, Spain, which has an unemployment rate of around 23% - (over 40% for the under 24s) - might actually follow suit and follow the Eurozone withdrawal and currency devaluation route to try and stimulate a pick-up in its own industry and boost employment. Indeed it is perhaps looking more and more a possibility that the Eurozone will break up and the EC would become a true Common Market in terms of trade alone without the huge cost, and unpopular bureaucracy and interferences, of the major European political monolith or Super-State.

But any unravelling of the Eurozone initially, and the EC bureaucracy eventually, would be destabilising and create huge uncertainty for years to come and this is an environment in which gold and silver will likely flourish. Even if this does not happen, uncertainty that it may indeed occur, will have much the same effect, and this could keep on until the financial crisis is brought to an end - which could also still be many years hence.

Coming back to the likelihood of a Greek default, should this occur sooner rather than later, the effects could be disastrous for a number of banks. Initially, they would be mostly French and German, but the domino effect would reverberate worldwide, with other European, and the American banking systems getting near collapse and some substantial bailouts necessary to prevent this.

Western politicians are unwilling to see any of this occurring, but one suspects some eastern nations, and notably China, are preparing for just such a scenario - hence the general impression that the Chinese Central Bank is building its gold reserves substantially, but surreptitiously, - and also that the state has been propagandising its burgeoning middle classes to buy gold as an investment to enrich them in the years ahead.

Currently it does seem that sentiment towards gold and silver has undergone a change from the beginning of2012 after a shaky end to 2011 which may, in retrospect, turn out to have largely been due to year-end technical portfolio adjustments. China in particular has been an even bigger purchaser this year than last which has been underpinning the market. India has been a little more sensitive to higher gold prices and there is some evidence that in the jewellery sector there lower tenor items are being produced to mitigate this, which has also been having an effect on demand. However, historically the Indian market tends to adjust to higher prices fairly quickly and demand may well pick up again as the year progresses.

There have also been suggestions from some of the major banks, hardly prone to optimistic over assessments of the gold price, that at $1700, gold has found a new bottom. While it is perhaps too early to call this, it does seem to be consolidating above the $1700 level for the moment. But recent months have seen considerable volatility in precious metals prices with $50 movements one way or the other relatively commonplace.

But, the continued debasement of global currencies through QE (money printing) and effectively negative interest rates, coupled with the ongoing global financial turmoil would seem to be on balance potentially supportive of far higher precious metals prices ahead. The move above $1700 followed immediately on a statement that U.S. monetary policy would remain loose with low interest rates until at least 2014 and the implication that the money supply would continue to be expanded. Thus this is ongoing for at least another couple of years with low interest rates making a non-interest bearing ‘security' like gold less unattractive to savers.

Silver may be the real beneficiary though. It tends to be more volatile than gold both upwards and downwards. A sustained run-up in the gold price would thus likely see an even bigger rise in silver. The silver price has been depressed by fears that its industrial usage will suffer from the economic downturn, but monetary moves are designed to maintain industrial output and demand, albeit at the expense of currency debasement. And should gold indeed have bottomed and move up to $2000 or higher this year, as many predict, we could well see silver back above $40 which would represent a far higher rise in percentage terms . Indeed a number of top analysts are expecting silver to test $50 again in 2012.

Interesting times!