Gold’s Next Leg Up

Last Updated: 14 September 2023

You can interpret the European financial crisis in two ways: by following the official line coming out of Brussels, Berlin and Paris, or by looking at what’s being prepared behind the scenes.

As the eurozone meltdown worsens, the pronouncements coming from political leaders are becoming ever more grandiose.

In early 2010, when Greece’s sovereign debt crisis first hit the headlines, the markets were calmed temporarily by the promise of loans from a new Europe-wide lending facility, the EFSF. The principle behind the EFSF was that the debt crisis could be solved by a complex system of interlinked national guarantees. This was all supposed to work behind the scenes, since EFSF guarantees wouldn’t require funding and didn’t impact the national debts of guarantor countries.

Two years later, with the debt crisis engulfing at least seven of the eurozone’s 17 member states (Greece, Portugal, Ireland, Cyprus, Italy, Spain and Slovenia), and Belgium now close to being drawn into the mix, much more ambitious projects are being discussed.

One new report mentions plans for a “European Redemption Pact”, covered by joint bonds from EU member states, which would “cover all public debts of EMU states above the Maastricht limit of 60 percent of GDP, roughly €2.3 trillion”. There’s talk of an EU-wide banking union, with a continent-wide deposit insurance scheme and a bailout fund financed by levies on financial institutions.

Above all, there are calls for “more Europe”.

“Step by step we must from now on give up more competences to Europe, and allow Europe more powers of control,” Germany’s chancellor, Angela Merkel, said last week.

Desperate times call for desperate measures. Unfortunately, as these mooted projects all require complex, multiple treaty amendments, they are unlikely to materialise in time, if at all. In the meantime, an increasing body of evidence suggests that governments are preparing for precisely the opposite: fragmentation, rather than further integration.

There are more and more calls for a suspension of the Schengen accord, which allows for visa-free travel across most of the EU. The French and German interior ministers made such a request in April, while Spain enacted a dry run last month, suspending Schengen for the European Central Bank’s governing council meeting in Barcelona. Britain, which never signed up to Schengen, last month hinted at a suspension of immigration if Europe’s economic situation worsens further.

EU officials warn that capital controls are also being considered.

A European Commission spokesman, Olivier Bailly, reminded reporters earlier this week that, if required, the EU can limit the flows of money across national borders.

“There is a possibility for member states to restrict movement of capital in specific cases relating to public order and public security,” Bailly said.

It’s ironic—and deeply troubling—that the flawed single currency project now threatens to demolish the original raison d’être for post-WW2 European integration: free trade and open borders. As the 1930s remind us, nothing is better guaranteed to turn a downturn into a depression than barriers to trade and capital flows.

The fanatical promoters of the euro, who ignored warnings that any currency union must have a political union as a precondition, have a great deal to answer for. Nor should the authorities that failed to control the Anglo-Saxon countries’ credit bubble, which contributed to Southern Europe’s borrowing spree, be let off the hook. And maybe one day the investment banks—Goldman Sachs chief among them—will answer for the role they played in helping eurozone member countries to lie about debt levels.

If there’s any bright spot in all of this, it must be for owners of bullion. The post-1971 fiat currency experiment appears to be nearing its end. While gold’s price is still nearly US$300 short of the record price of $1,912 recorded in early September last year, investors have been buying the metal steadily.

For a larger view, please click on the image above.

To give one example, the number of shares in issue of ETF Securities’ Physical Gold ETC (for full disclosure, I own some), which tracks the gold price, has recently moved to an all-time high.

As Europe’s crisis moves closer to its endgame, the outlook for precious metal prices is surely turning bullish once again.

  • Luke Handt

    Luke Handt is a seasoned cryptocurrency investor and advisor with over 7 years of experience in the blockchain and digital asset space. His passion for crypto began while studying computer science and economics at Stanford University in the early 2010s.

    Since 2016, Luke has been an active cryptocurrency trader, strategically investing in major coins as well as up-and-coming altcoins. He is knowledgeable about advanced crypto trading strategies, market analysis, and the nuances of blockchain protocols.

    In addition to managing his own crypto portfolio, Luke shares his expertise with others as a crypto writer and analyst for leading finance publications. He enjoys educating retail traders about digital assets and is a sought-after voice at fintech conferences worldwide.

    When he's not glued to price charts or researching promising new projects, Luke enjoys surfing, travel, and fine wine. He currently resides in Newport Beach, California where he continues to follow crypto markets closely and connect with other industry leaders.

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