Using Gold as a Hedge to the Greek Crisis

 |  Includes: LIHR, NCMGY
by: Dr. Stephen Leeb

A resolution to the Greek debt crisis is still nowhere in sight, and investor patience is wearing thin. Reports out yesterday indicated that the Greek government had wanted changes made to the terms of a rescue plan proposed by European leaders and the International Monetary Fund on March 25. According to various news accounts, Greek officials were looking for ways to limit the role of the IMF in the rescue deal, fearing that the conditions imposed by the organization would be too harsh. The Greek government denied these claims, but investors responded swiftly, driving up yields on ten-year bonds to above 7 percent.

The future looks bleak for the Greek government’s fiscal health. This year alone it will need to raise $40 billion -- $15.5 billion of which it will need to come up with by May. Total debt now stands at 113 percent of the country’s GDP, which is well above the euro zone's limit of 60 percent, while the budget deficit has ballooned to 12.7 percent of GDP.

And though the severity of this crisis has been known for months, Europe has yet to come up with a plan that inspires the confidence of investors. The EU nations had said they were prepared to offer Greece a lifeline in the case of an emergency, but how and when that bailout would occur was unclear. Last month, the EU and IMF announced that they had come up with a joint plan to rescue Greece, but again many of the details weren’t disclosed, such as the precise nature of the IMF’s role in the bailout.

Greek officials, meanwhile, have been trying to stir up interest for its debt in other parts of the world, with little success. According to reports, the appetite among Asian investors for a new $10-billion offering has been minimal. Officials are also targeting U.S. investors and will embark on a roadshow in the coming weeks. The problem though is that many new investors in Greek debt have suffered losses in recent months and are reluctant to take on greater exposure to the crisis.

Not surprisingly, the euro has steadily declined in recent weeks and months, as questions linger over the condition of other countries in the euro zone, like Spain, Portugal and Ireland. The long-term fiscal health of the United States is also worrisome, and increasingly investors are turning to gold as an alternative to the euro and dollar.
We have been encouraging investors for some time now to expand their position in the yellow metal. In particular, we’ve recommended Newcrest Mining, which is part of our Growth Portfolio, and Lihir Gold (LIHR), which is part of our online-only Fast Track Portfolio.
The two companies have been in discussions recently over the $8.4-billion takeover offer by Newcrest for Lihir. Lihir rejected Newcrest’s most recent offer, made on March 29. Both companies have acknowledged that combining the firms makes strategic sense – Newcrest has argued that the combined company would generate A$85 million a year in synergies – but as of yet, the two companies do not see eye to eye on shareholder compensation. Discussions have been on-going since at least February 15, when Newcrest made its first offer, and the Australian-based gold miner has said it will continue to discuss the acquisition with Lihir. If a deal were to be completed, it would be the latest in a string of mining company mergers in Australia.
Shares of both companies have done well as of late, with Lihir’s climbing almost 30 percent upon rejecting the takeover offer. Their performance reinforces our belief that investors are seeking out opportunities in gold, and both stocks, we believe, are worth owning for the foreseeable future.