The rain in Spain does not only exist on the plane

23 May 2012

By Josh Saul

In one of my recent blogs at Physical Gold, I wrote about the concept of Contagion. The clouds that now linger, present overwhelming jitters and understandably so. We all speak of Greece exiting from the Euro as an isolated inevitability but as we skim past the surface we can see that Spain and Italy are closely following suit and unfortunately European woes will have significant global consequences. Whilst the US is not hugely exposed to Greek debt it has more than $50 billion each to Spain and Ireland, $66 billion to Italy and $6.6 billion to Portugal.

“The exit from the Eurozone of one or two of the smallest countries may not be disastrous, but a disorderly break-up of the euro that includes either Spain or Italy could well be.”     (Paul Ashworth, chief U.S. economist for Capital Economics)

Whilst exposure to Sovereign debt is devastating, the following factors also need to be taken into account:

• According to Federal Reserve Chairman Ben Bernanke,  European holdings for the US account for 35% of prime U.S. money market funds in February
• A Greek Eurozone default risks the freezing of financial markets similar to the aftermath of Lehmans
• Europe purchased $49.2 billion worth of exports from the U.S in the first quarter of this year, or nearly 13% of overall U.S. exports
• A Greek Eurozone default presents a significant hit to U.S exports especially as the U.S rely on Europe for its manufacturing, this will slow US business, affect the value of US stocks and US GDP.

The significance for global markets is a stark one, especially for the US and in turn – Gold.  As exposure to Sovereign debt manifests itself into hefty losses and global stock markets lose liquidity, European as well as US GDP will diminish and the value of currency both in Euro’s and Dollars will suffer. The cost of goods and services will become more expensive and more currency will be required to the buy an ounce of gold thereby increasing support for gold’s safe haven status. The correlation is an interesting one for gold investors as gold has an inverse relationship to the Dollar. Whether or not the US admits to needing to print more money, the Dollar could face immense depression and with QE as an added bonus for Gold’s upswing.