Finally after weeks of deliberating, Eurozone finance ministers agreed on a 130-billion-euro ($172 billion) bailout for Greece. After a marathon 13 hours of talks through the night, (I still don’t understand why these officials have to work at night and not during the day), Eurozone finance ministers agreed on a rescue package with strict conditions.
Included in the bail-out package are measures to cut Greece's debt to around 120.5% of gross domestic product (GDP) by 2020. Greece will also have around 100 billion euros of debt written off as banks and insurers will swap bonds they hold for longer-dated securities that pay a lower coupon.
Private sector holders of Greek debt are expected to take losses of 53.5% or more on the nominal value of their bonds as part of a debt exchange that will reduce Greece's debts by around 100 billion euros.
The vast majority of the funds in the 130-billion-euro program will be used to finance the bond swap and ensure Greece's banking system remains stable: 30 billion euros will go to sweeteners to get the private sector to sign up to the swap, 23 billion will go to recapitalize Greek banks.
A further 35 billion will allow Greece to finance the buying back of the bonds, and 5.7 billion will go to paying off the interest accrued on the bonds being traded in.
While the deal with provide immediate relief to Athens and financial markets, it is certainly not going to help the economy. Since almost nothing will go directly to help the Greek economy, how is the country going to return to a path of sustainable economic growth? (Figures last week showed its economy shrank 7% year-on-year in the last quarter of 2011).
I remain extremely sceptical.
In the meantime, in their report Gold Demand Trends for the year 2011, the World Gold Council (WGC) reports that the global demand for gold grew by 0.4% last year to 4,067.1 tons. According to the report, in 2011 the annual value for gold demand was a record US$205.5 billion which was an increase of 29% above the 2010 value.
While global jewellery demand of 1962.9 tons was some 3% lower than the demand in 2010, investment demand grew by 5% to a record 1,640.7 tons. According the report, “demand for gold bars and coins remains healthy and growth in gold coins in particular was responsible for much of the year-on-year increase in Q4 investment. Bar demand was unable to sustain the elevated levels of Q4 2010, but nevertheless remained well above the 240.3 ton average of the previous 8 quarters. On an annual basis, 2011 bar and coin demand surged 24% to 1,486.7 tons largely due to the growth in demand for gold bars Growth in bar and coin demand was geographically widespread, with healthy gains noted in countries in all regions.”
During 2011, central banks also stepped up their buying of gold. The World Gold Council reported that some 439.7 tons of gold was purchased by central banks, the highest figure since 1964. The WGC said. “The net buying trend which started in Q2 2009 has proliferated as emerging market central banks have continued to add gold on increasing concerns about the creditworthiness and low yields of their existing reserve assets.” In addition to China, Thailand, Vietnam, Indonesia and South Korea were all buyers of gold.
According to Marcus Grubb, Managing Director of Investment at the WGC, it is likely that China will emerge as the largest gold market in the world for the first time in 2012. During 2011 the Indian market consumed more than 933 tons, accounting for 25% of total coin and bar demand. While this particular category of products saw a 5% increase, overall year-on-year gold demand in India was down 7% Meanwhile, Chinese gold consumption in 2011 rose 20% with that nation consuming almost 770 tons.
While the USA and Western Europe struggle to deal with the changing global dynamics and refuse to see and accept these changes, they will continue to blame everyone else for their downfall. They will imprison their own people as they have done in the past by imposing capital controls, higher taxes, and impose a series of measures that will erode their citizens ‘civil liberties’. While nothing catastrophic is likely to occur overnight, and while it is difficult to predict when the end game will occur, it just makes prudent sense to protect one’s wealth.
Our entire global monetary system is looking more precarious month by month, and financial leaders are yet to find any solution. And, one thing for sure, it is not going to get any better in the foreseeable future, and instead it is only going to get worse. It is important to own tangible assets in such times, and of course, gold and silver have endured the test of time and have proven to be an effective preserver of wealth. And, once again, it will prove to be just that.