David Rosenberg of Guskin-Sheff is a deflationist, but unlike some (like Robert Prechter), he’s also pro-gold.
Today he argues that the breakdown of the euro is very bullish for gold.
ECB IS NO BUNDESBANK, EURO IS NO D-MARK
In the interim, the ECB has been forced to water down its charter as it permits
sub-investment grade Greek bonds as collateral. Sadly, the central bank is not a
remake of the Bundesbank and the Euro is less of a “hard currency” than its
architects could have ever envisaged a decade ago. Now there is talk that the
ECB is contemplating a quantitative easing plan (see ECB Should Resist QE
Siren Call on page C14 of the WSJ). The case for gold heading to $3,000 an
ounce is getting stronger by the day. The Euro has already broken below 1.30 to
the U.S. dollar and there is plenty of room for additional decline going forward.
It’s only at a one-year low — wait until it moves to a decade low.
Make no mistake — the problems in Greece are mirrored in places like Portugal
and Spain — this is not about liquidity, like Bear Stearns and Lehman, it is a
crisis in confidence (Banco Santander, widely seen as a barometer of financial
health in Spain, cratered 7% yesterday). The FT reports today that there has
been some market chatter that Spain has been “negotiating” with the IMF for
assistance (€280bln) too. History shows that crises over confidence are tougher
to repair over the near-term than liquidity crunches. The fact that Greek short-
term bonds have collapsed in price even more — even though the country does
not have to come to the market for the next few years so long as Germany
comes through after the vote — is a case in point.
So contagion risks loom and there are simply not enough trees on the planet
that can provide enough paper currency to backstop countries like Portugal and
Spain. Moreover, what investors see is that if there is so much political foot-
dragging in Germany and other EU countries to approve a bailout of tiny Greece,
achieving a rescue plan for other large basket-cases will be even more arduous
a task. Have a look at Martin Wolf’s column on page 9 of the FT — A Bailout For
Greece is Just the Beginning. What a tale of woe. And let’s not forget about Italy
— its public finances are less dire but still fragile (see Much to Play For on page
7 of the FT).
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