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Greece, Financial Drachma & the Gold Price

What Greece's new June elections mean for the Gold Price...

GREECE CANNOT form a government after its recent elections, so it will now hold fresh elections in mid-June, writes Julian Phillips at the

We have come to the point where the bad news is out – the markets are telling us that Greece will likely leave the Eurozone and possibly the Euro as their 10-year debt continues to trade at 27% yields. Greece may not pay out €436 million to creditors and keep it, fearing they will not get the next bailout tranche. Reneging on the obligation also would constitute a default triggering derivatives contracts and clauses requiring the settlement of other un-swapped bonds.

Meantime the country has no government to make the choice. The country may run out of money by early July. The stand-off has reignited concern that Greece will renege on pledges to cut spending as required by the terms of its two bailouts negotiated since May 2010.

This potentially blazes the trail for Spain to ask, first, for a bailout. Already "rescued" Portugal and Ireland are looking more and more each day like Greece. Italy may follow. We're now looking at the worst possible scene.

Whether this will happen is not the point for investors watching silver and the Gold Price. The fact that markets are aware of this situation and are, in fact, discounting it is much more pertinent.

If the Euro doesn't collapse and if these nations leave the Eurozone, then do not expect to see the Eurozone fall apart but to be much stronger having jettisoned the weak members. This would strengthen the Euro enormously and send it back up towards the $1.40 area. We do not think this is being discounted yet.

The old rule remains that when the news is at its worst, an historic turning point in markets is likely at hand. With silver and the Gold Price moving with the Euro, traders may keep the precious metals moving with the Euro as it rises. This is where we are now.

Meanwhile, we have been witnessing a massive flight of capital out of Greece, and also out of those banks – such as SocGen – that are large holders of Greek debt. Any exit of Greece from the Eurozone would have to see their banks re-capitalized. Under the Maastricht Treaty, which formed the Eurozone, any member state can impose Exchange Controls for a short period of time while that country remains in the Eurozone. In Greece, that could happen just to close the exits and prevent a further run on the banks.

If the government decides to switch back to the Drachma, then expect to see the steps Argentina took when they switched from the US Dollar back to the Peso. These would automatically lead to the changing of all money, bank deposits and all, to Drachmas.

We would then envisage not just a two-tier currency – one for trade and one for capital. Expect the "Commercial Drachma" to trade at around 50% of the value of the Euro and the "Financial' Drachma" at a 30% discount to that. While this would stall imports, import replacement would spring to life inside Greece and a boom would begin. Tourism would likely roar as cheap holidays drew in huge volumes of tourists.

The central bank would impose draconian exchange controls grabbing all the foreign funds they could. Banks would be eager to return to Greece as they would see a sort of "scheme of arrangement" where they could bring in loans through the "Financial' Drachma" and, provided the loans were given a 10-year plus life, would be allowed to repay them through the "Commercial' Drachma" giving them not just huge capital profits but a boost in their interest earnings over the life of the loan.

The resulting low cost of labor and the financial incentives to manufacturers could see manufacturers move production there too. Such a positive outcome for nations that follow this path is normal.

Yes, many in Greece would struggle terribly; however, the core of their financial system would continue, and maybe even thrive. The success or failure of a Greek exit from the Eurozone and probably the Euro would depend entirely on how the financial side of the departure was handled.

It's well known that Greeks love gold, and rightly so, especially when one considers what lies ahead for them. But they have been Buying Gold and preparing for this eventuality for the last two years.

The Eurozone banking system would suffer tremendous losses and would initially suffer the blows of lost confidence. Again, we're seeing this now. The overall Eurozone has entered a mild recession that could get worse, but the same could apply to the US, travelling some distance behind, in a financial structure more capable of weathering such storms.

The fiscal and political unity in the States is responsible for the current strength of the Dollar; however, should the global debt situation worsen and there is a maturing of other major, US problems, then the US will follow Europe; before this happens, however, the emerging world will need to reach the point where it equals the financial world of the developed side of the globe. The Yuan going global would start the process.

We would have to see a rapid expansion of the money supply in Europe as toxic national debt values shrank and needed a fresh injection of capital to replace lost value. We're on the brink of another chapter of this right now. While this would undermine confidence in the Euro and the Dollar, the reality that these currencies are the only available means of exchange will continue to ensure their use and control over the developed world.

But the loss of confidence process would result in investors seeking to preserve the value of their wealth in gold and silver bullion even more than we have seen in the last few years. Many times we've discussed just how gold would be used to reinforce the current currency system and how that process would become reality. More importantly, the institutionalization of gold in an active role in the monetary system would become a reality.

This would start in Europe, but the US would dovetail into the developments as a cautionary reinforcing of its own monetary system too.

It may be that the public discussion over where Germany's gold is held will lead to public pressure on Germany to repatriate it. If this happens, expect other nations in the develop0ed world to follow over time, accompanied by the recognition of gold's importance in the reserves of a nation. This will highlight the desirability of gold in reserves to other nations outside the developed world and an acceleration of the demand for gold by the world's central banks.

Buying Gold for your own personal reserves...?

JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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