The Deathblow for Greece, A Congress vs. Goldman Photo Reenactment, Why Gold Isn’t a Bubble and More!

• S&P deals deathblow to Greece… Dan Denning on how Greeks (and Americans) will pay the price

• Congress grills Goldman… The 5’s photo-reenactment of another congressional boondoggle

• Frank Holmes explains why gold still has plenty of room to rise

• Plus, Byron King on the 100×45-mile oil spill in the Gulf, and what it means for oil investors

  When it comes to Greece, really, it’s like this:

At this moment, there’s no telling what will happen to Wile and his Acme rocket. Maybe he’ll be shot off course, straight down into the canyon bed. Or the leather straps will break, and he’ll helplessly roll over the cliff’s edge. Most likely, the rocket will explode right where it rests, reducing Wile to a black stick figure of smoldering soot.

But two things are for sure:

1) The fuse is lit. There’s no turning back.

2) Wile won’t be catching Road Runner.

 So goes the fate of Greece. With another credit downgrade from S&P yesterday, Greece’s debt status has been reduced to BBB “junk” and its Acme rocket fuse has been lit. No longer an “investment grade” debtor, the Greeks watched two-year bond rates spike another 500 basis points, to over 20%… a kiss of death from the bond market. For comparison, the yield on equivalent German paper is 0.8%. As the FT noted today, Greek two-year yields are now the highest in the world.

Though we’ve been suggesting it for some time, it’s now officially a question of not “if,” but “how” Greece will collapse. Either the EU/IMF bails ’em out or the Greeks default. We’d be surprised if the EU has the stones to put the euro through a sovereign default. At the same time, a bailout is going to be really expensive… Goldman Sachs estimated earlier this week the tab would exceed 150 billion euros.

  If you need just one more shred of proof Greece is on its way down: Regulators there have banned short selling on the Athens stock exchange, just like we did to financials in 2008. And the cycle continues…

  Portugal and Spain had their credit ratings downgraded in the last 24 hours, too. As the Richebacher Society’s Rob Parenteau forecast here on Monday… this could end up being a far bigger mess than most people expect. We’re putting together a few ways you could prepare for it, right here.

  The chaos in Europe pushed the S&P 500 down 2.3% yesterday.

“A great whirlpool of uncertainty now begins to swirl over who is going to pay for what, or whether it can be paid for at all,” notes our colleague Dan Denning. “That is not good for investors in the short term. But there IS one way in which it’s useful. It’s preview.

“That is, the Greek problem is also a euro problem. And the euro problem is a paper-money-backed-by-nothing problem coupled with high levels of debt. The only resolution to such a sovereign debt crisis is default or inflation. Because it does not control its own interest rates or money printing (monetary policy), the Greek government is at the mercy of the European Central Bank. And being genetically descended from Germany’s Bundesbank, the ECB is not willing to print euros in order to save Greece. Default remains.

“The Federal Reserve, of course, CAN print as much as it would like. And this is why we firmly believe the resolution of America’s own sovereign debt problem will be inflation. That’s the investment scenario we’re preparing for… a world awash in increasingly worthless paper claims on the full faith and credit of the United States government. But in the interim, the dollar is getting the 2008-like ‘flight to safety and liquidity’ bid.”

  Indeed, the dollar index climbed a full point yesterday, up to 82.5. The euro, on the other side of the trade, is down two full cents this week, to $1.32 as we write.

  What an appropriate day for the first National Fiscal Summit here in the U.S. As we mentioned earlier this week, a truly absurd number of political elites are descending on Washington today to debate and discuss our deficit crisis… so many, we wonder if anything will actually happen. Addison was invited to fly our flag there today, best he can. Stay tuned for updates and anecdotes from him on this bigwig powwow.

  Also in Washington, Goldman Sachs was the apple of America’s eye ALL day yesterday. Tuesday was Goldman’s day in Congress, where various senators and representatives tried their very best — with the help of every metaphor you can imagine — to convince Goldman that they are, in fact, henchmen of the apocalypse.

We suppose this was a little more interesting than the usual congressional flogging, since Goldman’s SEC suit hung in the balance. But really… business as usual, for all parties involved. If you missed the 11-hour (!) hearing, here’s our reenactment:

You guys are evil Wall Street bookies, crooked car salesmen,
cheating blackjack dealers. Admit it.

Seriously?

Levin: Is it ethical for market makers
to not disclose adversarial positions?

McCain: Hey, don’t ask me, Carl. Economics is not my strong suit.

What about you, Frenchie… “Mister Tour-eh.” I’m going to curse a little bit and scare you into confession. But I’m quoting a Goldman e-mail, so it’s OK: How many “sh*tty deals” did you sell to clients?

I “categorically deny this allegation.”
And “it’s [pronounced] ‘tour,’ not ‘tour-eh.’”

The end.

  After a hearing like that, no surprise Goldman stock shot up. It managed to gain 0.6%, in spite of the S&P’s 2% tumble. Shares of GS opened up another 2% this morning.

  Gold jumped over $20 yesterday, as high as $1,172. That’s especially notable, given the “flight to quality” Tuesday during the Greek downgrade debacle. If you recall, traders sold their gold in late 2008, the last time the market demanded safety. We’ll see if gold regains its safe haven reputation this time around… so far, so good.

  “Gold remains as a safe haven during times of economic uncertainty,” maintains Frank Holmes, a perennial presence at our Investment Symposium. “In the 1970s, double-digit inflation rapidly eroded wealth, and these days there is a lingering fear of higher inflation as the federal government piles more debt onto its already groaning balance sheets.

“But a key difference is that gold has gained stature as a legitimate asset class for investors. During the 1970s run-up, investment demand peaked around 27 million ounces, about half of what it is today. Contributing to this demand are new investment vehicles, including gold-oriented mutual funds and bullion-backed ETFs, both of which have made it easier for investors to allocate a portion of their portfolios to the yellow metal.

“We also have greater affluence in the developing world, where people have traditionally turned to gold to store their wealth. Central banks in these countries, most notably China and India, have built up their gold holdings as a way to diversify their foreign reserves away from the dollar and other paper currencies.

“The chart below compares the price performance of gold bullion during the 1970s bull market (green line) to the current price trend (red). As you can see, the price line since the start of 1999, when gold was trading just under $300, has been far less volatile than during the earlier period.

“The 1990s dot-com era was a bubble, and likewise the 2000s housing market. But gold? We don’t think so.”

  Last today, oil is just a bit lower, at $82 a barrel. The world seems a bit distracted, though… oil’s price seems less relevant than the 100-by-45-mile oil slick currently floating in the Gulf of Mexico — the still flowing aftermath of last week’s BP/Transocean oil rig explosion.

  “It’s absolutely imperative to shut off that oil flow,” our oilman Byron King wrote to his Outstanding Investments readers. “For a relatively modest-sized deep-water discovery, this thing sure has turned into the well from hell.

“This accident is Mother Nature’s wake-up call to everyone. Deep-water drilling is a high-stakes game. It’s not exactly a ‘casino,’ in that there’s a heck of a lot of settled science, engineering and technology involved.

“But we’re sure finding out the hard way what all the risks are. And it’s becoming more and more clear how the totality of risk is a moving target. There’s geologic risk, technical risk, engineering risk, environmental risk, capital risk and market risk.

“I’ll update you as things evolve. This is big news all through the offshore industry. There are HUGE environmental issues, and certainly big political repercussions. I won’t go there just now.”

Byron has fully briefed his Outstanding Investments subscribers on this matter. In the new world of risky offshore oil development and possible (if not inevitable) conflict over energy resources, they are well prepared. To join their ranks, check this out.

  “I first started with The 5 Min. Forecast two years ago,” a reader wrote to us yesterday, helping celebrate our third anniversary. “It was offered as a perk to my (then-new) subscription to Outstanding Investments. As background, my father had subscribed to Outstanding Investments years before… so when I told him I was now going to be ‘investing for myself,’ he strongly recommended OI to me as ‘one of the three most important newsletters I read.’ (This from a guy who has made millions over the past 30 years, best as I can tell.)

“Since I already had read several of Dad’s OI copies, I fully expected my new subscription to be of good value. But what I didn’t expect was getting the various Agora Financial e-mail newsletters as a bonus for free — The 5 Min. Forecast, The Daily Reckoning and the (now sadly lamented) Rude Awakening. Together, these newsletters turned out to be of equal or more value to me as Outstanding Investments itself!

“For the single investor, getting ‘good investment information’ is a huge problem. Such information usually available is either too under- or oversummarized; is often of dubious quality; comes too late; or, finally, is ‘too expensive’ to justify purchasing, given the size of the investment portfolio managed. But that is not the case with what information I see coming from Agora in its e-mail newsletters.

“So Outstanding Investments and The 5 Min. Forecast have definitely found a home among the ‘top’ newsletters I would recommend to my investing friends! I look forward to reading daily.

“And thanks, Dad.”

The 5: Thank you both. That’s very nice to hear.

At its current price — considering all the investment advice, market analysis and insider perspective you get — Outstanding Investments is a screamin’ deal. And at the low, low price of “free,” we think The Daily Reckoning and The 5 are worthwhile investments, too.

Cheers,

Ian Mathias

The 5 Min. Forecast

P.S. “I get flyers saying coins go down even though silver and gold go up,” a reader writes. “I cannot imagine how or why that would be the case — they always reflect the underlying metal — don’t they?”

“I’d like to know the options of storage,” says another, “and the tax consequences of cashing in on coins.”

“Question: How to sell? Coins are EASY to buy… BUT…”

These are all great questions — and ones we hear a lot. That’s why we’ve put together a free Beginner’s Guide to Coin Collecting. You can claim it here. All we ask is that you fill out a quick survey. Remember, it won’t cost you a thing.