By Geena Paul
LONDON (Commodity Online): The sub-prime crisis, recession, Dubai World disaster and now the Greek debt tragedy. What is the common link to all these incidents which happened during the past two years? Even as the world has been grappling with all these tragedies, there has been one market which was thriving on all these disasters. That is bullion. Gold always celebrates tragedies. And during these past two years there has been no dearth of tragedies in the world. And, gold has been on a high all through these catastrophes.
It all started with the sub-prime crisis in the US when fearing a collapse investors started parking their money in gold as a safe haven. From there, there has been no end to gold's wave of upheaval, cashing in on bad news. Again, even when India bought 200 tonnes of IMF gold in 2009 November the bullion market took it as a negative element as it feared that since India is going for gold there may be some more bad news coming to the market.
And, after the boom during the Dubai World crisis, now the Greece debt has come as a godsend for the gold market. Fearing that the Greece crisis will create economic woes in the European Union, gold prices started rising again now after a fall in the past few days.
The economy of Greece is the twenty-seventh largest economy in the world by nominal gross domestic product (GDP) and the thirty-third largest by purchasing power parity. In the first weeks of 2010, there was renewed anxiety about excessive national debt.
Some European think-tanks such as the CEE Council have argued that the predicament some mainland EU countries find themselves in today is the result of a decade of debt-fueled Keynesian economic policies pursued by local policy makers and complacent EU central bankers. Many economists have recommended the imposition of a battery of corrective policies to control public debt, such as drastic austerity measures and substantially higher taxes.
Countries like Greece are mostly at the mercy of their partners in the Eurozone. And, Greece's new government is working to correct a lack of credibility in the financial markets. A sharp spike in the financial markets for interest rates on Greek government debt suggests a very rocky road lies ahead.
At one point, the interest rate on 10-year borrowing went over 7%. Germany pays a little over 3% on borrowing the same currency for the same period. The difference is a risk premium - the extra return investors want to compensate for the danger they perceive that Greece might not repay.
The direct impact of those market developments is on investors who already hold Greek government debt, or bonds. The price of the bond falls, so they make a loss. It is, in effect, old debt with fixed payments that don't change, so there is no direct loss for the Greek Treasury.
For Greece, there is about 20bn euros of debt due for repayment over the next two months. Greece has spare funds for some of that, but it will have to borrow more to cover the rest.
Borrowing at the high interest rates now prevailing in the market for Greek debt would aggravate the risk of a default, by stretching the country's public finances even further.
The weak economic outlook is compounding the problem. Greece has its own domestic troubles, but the weakness of its eurozone export markets is another issue. New revised figures for the eurozone show growth ground to a halt in the final quarter of last year.
And, after watching the Greece crisis unfold, worried investors rushed to gold. And, traders are using gold as a hedge against the euro, which is wobbling on Greece's latest debt worries. As a result, gold and silver prices climbed up this week in the London market.