The latest Eurozone rescue plan—stitched together in the wee hours this morning via tense negotiations between German Chancellor Angela Merkel on the one hand and Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy on the other—has the markets all atwitter today. The thinking is that Ms. Merkel’s unexpected concessions—to allow Italy and Spain easier access to European Stability Mechanism (ESF…the Eurozone bailout fund) monies and enable the ESF to provide direct aid to troubled banks—may kick the can far enough down the road that an economic recovery will rescue everyone’s bacon.
Of course, we agree with Jim Roger’s assessment: when faced with an unsustainable level of debt, you cannot resolve the problem by borrowing more. It is perverse that the market interprets the results of this summit as “good” news…but of course, in the short run, it means no banks will go bankrupt and no countries will default on their debt, so in that sense, it is good…even if the long-term problem—and likely the eventual collapse—are now have become more severe.
So, as we have been saying since 2006, this means that paper currencies will collapse and precious metals will become more…well…precious, being a relatively reliable store of value in a sea of uncertainty. Right? Well…yes…but…we do foresee an increased risk of a deflationary depression when Germany’s ability to bankroll the insolvent nations of the Eurozone gets stretched too thin, as it inevitably will. In 2008 when it looked as if many big banks might fail, the markets tanked and there was a run on US Treasury bonds which were perceived as a relatively safe haven. The dollar appreciated sharply against other currencies and gold and silver declined in dollar-denominated value. We believe there is an increased risk now that a similar scenario—this time sparked by a Eurozone collapse—may play out in 2012 or 2013. Consequently, we are reducing our exposure to precious metals by cashing in our silver position.
Of course in the long run, we expect the value of the U.S. dollar to plummet and we will want to convert our cash back into silver before then. Should the long run arrive faster than we expect, being out of silver would hurt us. And there are significant short-term risks, too, the cardinal one being a Middle East flareup—e.g., an Israeli attack on Iran’s nuclear facilities—that would send the prices of oil, gold, and silver soaring instantly.
But we now believe that a the risk of a deflationary event has increased enough to warrant getting out of SLV with a profit here with the expectation we are likely to have an opportunity to get back into silver at a materially lower price.
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