A Gold and Silver Paper Default in the Wake of an EU Collapse

The EU has failed to recapitalize its banking sector, which still remains massively over-leveraged. They have not yet had their "Lehman moment" of truth.

Furthermore, governments of the Eurozone adopted the Euro as a common currency in part because by doing so, they could collectively borrow at much lower interest rates than they were used to when they printed their own money.

Now they cannot continue to do this because the beleaguered Eurozone has lost the confidence of the markets and cannot seem to regain it no matter what financial band aids are applied to the situation of excessive sovereign debt. Instead, confidence is largely confined to the currencies of those nations which still maintain a legal monopoly on its creation.

Printing Money Does Not Create Wealth

Everybody knows that money printing will not make a nation wealthy in the long run. Nevertheless, powerful constituencies benefit from money creation in the short term so politicians understand that their re-election depends on not thinking about the absurdity.

It is also often assumed that a wholesale Euro collapse would be U.S. Dollar positive since an overall EU default would cause financial panic, so money would flood back into US Treasuries as a safe haven.

This sentiment tends to weigh against using precious metals as an alternative safe haven — at least in Dollar terms. Nevertheless, the United States is also overleveraged in terms of its debt.

Precious Metals Likely to Spike on Euro Collapse

If you think that the prices of silver and gold are not going to rise much and that the physical metals are even going to be available immediately after the Euro collapses, you are quite the optimist.

The far more likely pricing scenario would include a demand spike for precious metals reminiscent of January 1980, as people in Europe rush to hard assets to protect their savings.

Fleeing to any perceived safe haven in the wake of the European sovereign debt crisis, liquid money has already flowed quickly away from the various banks, currencies and assets affected peripherally by the debacle.

Physical Gold and Silver Would Become Scarce

Any short term price decline in the precious metals seen during a time of massive economic uncertainty would likely result in physical metal simply disappearing from the market. This would blow up physical premiums relative to paper like the market has ever seen before.

The market got a preview of this in 2008, when silver was pushed from $20 all the way down to $8, despite a notably worsening financial outlook sparked off by the subprime mortgage crisis, falling U.S. real estate prices and the dramatic Lehman bankruptcy. This situation nearly caused a physical shortage panic, which was reflected in physical premiums of over 100 percent at times relative to paper.

The market’s subsequent response boosted the price of silver from its low of $8.44 in October of 2008 to hit a historic $49.77 high in April of 2011. This dramatic rise in silver’s price was further intensified by the ongoing European Sovereign Debt Crisis that began to make headlines in late 2009.

Of course, someone might still be willing to sell you a paper forward or futures contract during an EU collapse, but do not count on being able to obtain the physical metal. The declaration of Force Majeure would be almost a certainty, with a cash settlement offered in place of a metal deliverable when the time comes to take possession.

Basically, cashing out now to try and time the market in the middle of a major currency event is definitely a ‘picking up nickels in front of a steamroller’ strategy. It seems better to ‘be right and sit tight’ instead.

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