Greece and Gold

Right now the price of gold has not responded to the Greek Crisis. It may not for many months, but at some point the reality of the situation is going to make gold skyrocket. Why?

1) The European voters in Greece, France and even Germany have clearly told the politicians that austerity is not an acceptable course of action. In two major elections this past weekend, we saw an overhaul in management in two European countries, France and Greece.

"In France on Sunday, Francois Hollande squeaked past his opponent to win a clear majority for president. On the same day in Greece, the conservative-leaning New Democracy party and the Left Coalition party won the largest parliamentary pluralities. What is the same in both contests is that all of the victors ran on campaigns rejecting austerity measures that they claimed had crippled their respective economies, in favor of stimulus spending. Though it is only France and Greece that held elections, there appears to have emerged a widespread demand for reconsideration throughout Western Europe of the euro zone's recovery plan. And while the winning parties in Greece scramble to emerge from chaos and form some sort of ruling coalition, Hollande is secure as president, and has become the leader of this new movement, which will likely see major changes to the unity and economic integration of Europe."

German results were also a blow against austerity: "DUESSELDORF, Germany — Voters in Germany's most populous state dealt a decisive blow to Chancellor Angela Merkel's Christian Democratic Union on Sunday, preliminary results show, a potentially ominous preview of things to come for the chancellor in next year's federal elections" The voters in every country have made it very clear they do not like austerity but they want spending.

2) How are they going to pay for these programs? Every country in the EU is already spending more than they take in revenue. The only way to pay for these programs is to print more money. Quite simply there is no alternative. Either the governments cut back expenses AND raise taxes or they print more money. They WILL print more money.

3) Right now we are in a deep recession. In addition, we are in a panic (or more accurately a flight to safety). People want their investment to be safe. As a result US Treasuries are priced at the highest (lowest yield) in 50 years. People are worried and want their money to be safe. But in a highly leveraged system as the world is in today, this need for safety will cause the economy to stay very weak. Only when people are confident in the future, will business investment, jobs and the economy pick up. Instead of recognizing this and acting the current administration took the advice of pure Keynesian economists. While the government does need to act, HOW it acts IS important. Giving $500 million to Solendra to waste will not strengthen the economy, but instead will lead to further weakness. FDR was right that Fear is the problem.

One solution to get people to move out of treasuries is to scare them with inflation. The Fed is in part trying to calm markets and make long-term investments 'cheap', but something rings false. People are still sacred and not making normal investments. The hypothesis is the FED will take more and more extreme measures to force investments out of treasuries and into the 'real' economy.

At tipping point will happen at some point and people will realize that the US Dollar, Euro and other currencies can and are being printed in unlimited amounts. Once a crisis occurs in a currency, it takes years (decades?) for a country to recover. The only question is when will we move from deflation to inflation? To that question, I have no answer. But with each QE program, the time comes closer.

Once we have a tipping point from deflation to inflation, gold prices will skyrocket. But when???