The race is on. What appears to be the worst kept secret in Europe, that Greece is going to default on its debt, has sparked a race to convert assets to cash by those holding Greek debt, primarily the banks.
The banks are preparing themselves for the shockwave that will be the Greek default by selling down assets. Investment funds are following their lead, and selling positions in order to build up cash positions, and try and stay ahead of collapsing markets. Without a coherent and coordinated fiscal roadmap from Europe as yet, the great dash for cash has begun.
What investors and speculators are hoping for is some kind of recapitalization for European banks, in the form of quantitative easing, or printing money. This of course will give a huge boost to commodity and equity prices, as newly printed money given to the banks to recapitalize will no doubt go straight back into the market.
The problem is, European taxpayers will have to foot the bill for newly printed money in the form of taxes, and for many European governments to force this would be political suicide. Added to this issue is that Greece may not be the only country that needs bailing out in Europe, with France, Ireland, Spain and Italy all potentially needing help.
To compound matters, the Head of the IMF (International Monetary Fund), Christine Lagarde, has stated that the IMF also needs funding. The IMF is usually the one who gives bailouts, rather than gets them. The U.S., as the main shareholder of the IMF, and also the biggest debtor nation in the world, is unlikely to want to fund European banks via the IMF. If they did, then it would likely be under such stringent measures that the European people would say no thanks. So the choices for European governments are limited to say the least, and for European banks the choice is simple, sell the silver, literally.
The gold bugs out there are having their nerve tested at the moment. Gold, which is promoted by many as the safe haven investment, has been hammered over the last week. In the current month of September gold has traded as high as $1920 per oz and as low as $1530 per oz. For those predicting gold to rise beyond the USD $2000 mark, and I am not one of them, we will have to see some kind of money printing in either Europe or the USA. As we know, only 1 in 100 trades in gold are in actual gold, with the other 99 being in paper gold. Paper gold, is where you essentially buy the gold price through a bank issued derivative, or an ETF (electronically traded fund) but not actual physical gold. It is via these instruments that the volatility in gold is coming from, because this kind of bubble asset, paper gold, is one of the first things to get sold in the race for cash. As we move closer to a Greek default, I expect to see more paper gold selling, and I repeat my prediction of a few weeks ago that gold will close the year below the USD 1400 per oz mark, as banks and investors will need cash for their balance sheets rather than paper gold.
The other bell weather commodity is oil. Oil and gold have been seen as a hedge against inflation in recent times. However, as the likelihood of more money printing becomes less and less, positions in oil and oil derivatives, held by banks and hedge funds, are being sold. Oil demand is also running into trouble. Despite the fact that NATO has managed to bomb Libya’s oil supply from the market, global growth is non-existent. Of course the argument that Chinese demand will make up for lack of growth in Western economies seemed not convince the secretary general of OPEC in Dubai recently, who said demand for oil was weak. With selling pressure coming from banks and hedge funds as they scramble for cash, and a lack of demand, I reiterate my prediction a month ago of oil prices sliding to as low of USD $30.
The financial market investors, banks and funds, have woken to the fact that governments cannot just keep printing money and loading the tax payer with more debt. The Federal Reserve has also acknowledged as much, announcing operation “”Twist”” which is really just an exercise in musical chairs. The problem is not economic growth. There is none of that. The problem is banks balance sheets. A Greek debt default will mean a further collapse of banks balance sheets, and printing money is not going to solve this problem. An alternative to debt finance is what is needed. In the meantime, there is only one solution and that is to sell assets, and financial markets will remain under pressure, as banks and funds make a dash for cash!
Current markets are anything but global or integrated. What if we had a paradigm shift in the way we think and transact when doing business with each other? Balanced global trade can only occur if we have transparent, accessible and efficient markets. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.
Sam Barden is founding Partner of SBI Markets DMCC, a Dubai-registered commodities trading and advisory company. Barden has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.