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How does the Italian economy affect gold and silver?
Italy continues to plunge deeper and deeper into an economic pit that it cannot dig itself out of. As of yesterday, Italy’s 10-year bonds rose to 7.25% interest well over the 6.6% that is commonly associated with default or hyperinflation. Several major institutions have come out and said openly that Italy is finished. Barclays stated, “Italy is now mathematically beyond the point of no return.” They stated within the body of their press release that even with significant austerity measures and the most optimistic growth rates, it is impossible for Italy to dig itself out of the hole. In fact, when Italy crossed over the 5.5% mark they crossed the point of no return.
Up to this point, all major economic players have been operating off the principles that certain institutions and countries are too big to fail. Unfortunately, this principle is coming back in the form of an almost impossible situation. For Italy to stay out of the bond markets for the next three years it would require 650-700 Billion euros. The problem is Italy can only request up to 160 Billion euros from the European rescue fund, which barely begins to scratch the surface. Additionally, if Italy requests these funds it will nearly wipe out the entire European rescue fund, which only has 270 billion euros after meeting its obligations to Greece, Portugal, and Ireland. “It’s hard to see that Europe would have the resources to take a country the size of Italy into the bailout program,” Finnish Prime Minister Jyrki Katainen said this week. Europe simply does not have the capabilities to handle bailing out the third largest economy in the Eurozone.
Italian Bailout or Printing Money?
This means that there are two options, which seem most likely. First, that Italy goes to the IMF and a deal is spearheaded by the US, China, and their conglomerates. The problem with this arrangement is that in the end any supposed solution is only temporary and Italy will be back in the exact situation in three years and more than likely several major countries in the Eurozone will experience the exact same kind of debt problems.
The second and final option is that ECB decides to allow the printing of money for the first time since its founding. Ultimately, this will be a deathblow to the superiority of the Euro over many other countries’ currencies, but it may be the only way to secure the Eurozone survival. At this point, Germany is counting the cost of continuing to bailout every desperate country, which seems to be every country in Europe. At some point the cost will be to high, which either means the problem countries have to go or Germany will withdrawal. While printing money will inevitably kill the Euro and the Eurozone countries it is the only way to somewhat evenly bailout these countries. Let me be clear inflation is not even a viable economic option in my book, but it seems to be the only option that will result in the EU surviving.
In the end, neither option is a good economic solution. It simply pushes an inevitable consequence down the road. However, both options are inflationary in nature and both are extremely good for precious metals in the long-term. If you have assets invested in the euro get out while you still can. We are heading towards the eye of the storm.
