On Friday, short positions against the euro on US exchanges rose to US$7.6-billion, according to the U.S. Commodity Futures Trading Commission. This is the largest ever recorded net short position against the euro.
News last week continued to play out around the crisis in the eurozone countries, and in particular, Greece. Many pointed to Greece’s negligible contribution to the eurozone GDP (see chart below), but it’s not the extent of Greece’s problems that’s worrying investors - it’s the uncertainty concluded from having no prior precedent. Investors are wary of the first big test for the euro. These are defining moments for its durability and longevity. Uncertainty surrounding Greece’s budget has magnified the sentiment of euro shorts.
You may have seen many charts about the size of the European countries' deficits before, but I find this one the most intriguing. Here you can see that Greece has a budget deficit of 12.7% of GDP BUT it constitutes only 2% of the entire eurozone’s GDP. Much more worrying for the euro is the size of deficits for both Spain and France when you take into account their percentage of eurozone GDP, which add up to over 30% of the total.
This needs to be taken into consideration with the looming public debts each country holds. Portugal, for example, has a debt to GDP ratio that is set to hit 85 percent this year. Greece’s is almost 113 percent.
The Absurdity of Greece
The more we hear about the fiasco with Greece, the more we see how absurd things have become. The Mail Online reported Goldman Sachs' involvement in ‘helping’ Greece to attain euro membership...
Goldman Sachs struck a secret deal with Greece to help it mask its vast debts...
The Wall Street giant is claimed to have reaped as much as £192million in fees by entering a complex currency transaction in 2001 that helped Athens borrow cash without putting it on the books as a loan.
The so-called 'swap' deal, while permitted under EU rules, helped Greece meet eurozone limits on government borrowing.
Furthermore we were surprised to hear that the Greek government has only just made it mandatory for shops to keep receipts, and only 150k Greek citizens have declared income of over 100k euros, with 90 percent declaring less than 30k. As many economists have pointed out, this is hard to believe with a population of over 11 million. In other words, tax evasion has been rife.
The Weak Euro Effect
Weaknesses in the European countries have inevitably played out in the markets.
The chart below plots the Euro Index over a 1 year period. What’s noticeable is not that it has declined recently, but that it has much further to fall.
In response, the gold price recorded its highest ever gold fix in euros yesterday - 808.072.
In the very least the euro has been dealt a heavy blow. Confidence in its durability has been questioned. The real effect should be played out in countries that were looking to diversify away from huge dollar reserves. In their eyes, the uncertainty in the euro will add to the appeal of gold. These are bullish signs for gold. Could a new bull rally be coming soon? It looks likely, but we have to keep an eye on the euro, the US economy and other factors.
To find out the next move, stay tuned.
Disclosure: no positions