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Despite the rally in precious metal prices, the shares of mining companies have been underperforming relative to metal prices. Experts point out that many mining companies are facing difficulties – especially those operating in emerging countries. Miner strikes in South America's and Africa's most important mining countries, as well as increasing production costs are weighing on the performance of mining shares. Furthermore, many investors fear expropriations and nationalisations of mining companies operating in South America and Africa. But there are also experts who believe that right now is the time to buy shares of gold and silver producers.

The Zimbabwean government’s recent decision to force international investors holding shares in the country's mining companies to transfer the majority of those shares to a national fund has led to concerns that other countries may initiate similar moves. Some South African politicians have been calling for the nationalisation of the country's mining companies. Politicians such as Julius Malema, president of the ANC Youth League, are scaring global investors with his vision of a public mining sector. South Africa and Zimbabwe are the two largest platinum and palladium producers. Experts have repeatedly warned that nationalisations in these countries could lead to supply shortage of platinum and palladium, which would in turn lead to rising prices in products that use these metals (notably, automobiles).

Some South American governments are also striving for nationalisation. Just recently the Venezuelan government announced the nationalisation of the country's gold mines, while in Bolivia, Evo Morales' government is also flirting with further expropriations. A growing number of market participants are afraid that, due to the moves of left-oriented governments such as the ones in Venezuela, Ecuador, Bolivia and Uruguay, the mining sector could face serious difficulties in these countries.

But there are others who are sounding a more optimistic note. One of them is the renowned hedge-fund manager David Einhorn. In a statement regarding the financial performance of his company Greenlight Capital, Einhorn makes it clear that the gap between the prices of most commodities and mining shares is too large, and that shares in certain gold mining producers offer compelling investment opportunities. Einhorn has significantly reduced his investments in commodities in order to transfer his capital to MarketVectors Gold Miners ETFs. Considering the actual gold prices, gold producers have an enormous profit-making potential. Einhorn is convinced that gold prices will continue to surge and that investors will soon recognise the potential in mining companies, leading to a strong rise in mining shares. Einhorn became famous for predicting the crash of the American investment bank Lehman Brothers. The bank filed for bankruptcy in September 2008.

Nathan Lewis is the host of the website NewWorldEconomics, and the author ofGold: The Once and Future Money. Nathan has provided much analysis of many of the key macroeconomic issues confronting the world today, along with commentary on monetary history.

What’s your take on the recently-proposed European Union rescue plan for Greece? Will it lead Greece back to economic stability and growth – or is it merely “kicking the can down the road”?

Nathan: What the government of Greece, or any government that finds itself in a similar situation, should do is to start with a clean sheet of paper and make a list of how things would ideally be in some happy post-crisis era. If I were to make a list like that for Greece, I would put on it a major tax reform that included some sort of flat-tax system like that adopted by neighboring Albania and Bulgaria. I would probably choose to stay with the euro unless the European Central Bank’s mismanagement becomes intolerable. I would decide on what government services we would like to provide, and then I would decide on how many employees would be necessary to provide that, and what a reasonable compensation scheme for them would be. The end result would be a very clean tax system, let’s say a 16% flat income tax and a 15% VAT, and nothing else. And, a lean but effective public sector, leading to a balanced budget. I would take a look at the existing debt, and write it down to the point at which it would be relatively easy to manage.

Then I would start moving in that direction, policy-wise. The EU “rescue plan” accomplishes none of this. Greece’s latest 50%-writedown plan is effectively the same as a default, so we don’t have to worry about “avoiding default” anymore.

Was European Monetary Union a flawed concept from the start? Is the eurozone in its existing form sustainable?

Nathan: No, the European Monetary Union is a perfectly fine concept. Europe has always had a “single currency.” This is because these are small countries, and have always had a lot of trade with each other. Generally speaking, the smaller the country, the more trade it has in relation to its GDP. Greece’s population is about the same as Los Angeles. The size isn’t much different than southern California. Think about the trade that Los Angeles has with the rest of the United States, or the world. You can see why it is advantageous to have a unified currency, rather than separate floating currencies.

In the past, Europe’s unified currency was gold. The franc or the mark or the lira were all linked to gold, and thus their exchange rates were fixed. Today, we don’t have that system, so it is logical that Europe would drift towards some other sort of unified currency system.

The problem is the idea that using the same currency means that there needs to be some sort of fiscal linkage, or central bureaucratic state. This is not true at all. It just means you do business using the same unit of denomination. Just like using the metric system. We don’t need fiscal unification to write contracts using the kilogram or metre. Some people have estimated that about 80% of all dollar bills in existence are in use outside the United States, as the international currency of the world. These people can use the dollar in their business and contracts, and it doesn’t bother anybody.

Indeed, there was a lot of currency sharing even before the euro. Like most smaller countries with low-quality currencies, the government of Greece and most corporate borrowers didn’t issue most of their debt in drachma. Nobody would buy it. Most of the debt was issued in foreign currencies, primarily Deutschemarks I’d guess. This is just like Mexico, which, until recently, issued most of its debt in dollars. So there was already an informal “unified currency” for a lot of business.

The root of this idea, that using the same currency needs fiscal oversight and integration, seems to be in the idea that a sovereign default would lead to turmoil for the euro currency. But this isn’t necessarily true at all. If the euro was falling in value, the European Central Bank could just reduce euro base money, shrinking the supply and thus supporting the value. The euro is just a counting-unit, and if the value of the unit is OK then there’s no real problem.

So, technically, I would say there is no need for fiscal integration at all. However, the euro creators sensed two political problems. First, the ECB would be incompetent. Although solving the problem of a too-low or too-high euro is very easy to do, by adjusting base money, the ECB’s bureaucrats don’t know how to do this. They would be likely to mess it up. Second, in the environment of sovereign default and the inevitable banking and perhaps commercial financial turmoil that would accompany that, the ECB would be under great pressure to do something, such as buying the debt of the struggling government or bank. In short, printing money to solve the problem. This is in fact what the ECB has begun doing today, although it is specifically banned from doing so. The people running the system could not be relied upon to do the proper thing when under stress.

Despite all this, note today that the euro – the currency itself – has actually been fine. It hasn’t been plummeting into a black hole or something like that.

The idea that a currency union needs a centralised state is being very heavily promoted right now. If you think about it for twenty minutes, I think you will agree that the government of Germany doesn’t need to pay the government of Greece’s debts, just because they use the same currency. It is no different than me and you. We both use dollars, but that doesn’t mean that I have to pay your credit card bills. This shows how many people are actually thinking about it – almost none. They are just hearing something somewhere, and then repeating it. The banks (the main source of financial information for the media) and the media are heavily influenced by those who want a centralised, non-democratic European state. There is a propaganda campaign going on. It’s a form of problem-reaction-solution.

Do you expect to see the European Central Bank resorting to large-scale money printing in an effort to “paper over” problems in the eurozone?

Nathan: Yes, I think they will do this eventually. This is because the governments don’t seem to be able to manage the proper solution, which is to let governments default. Greece has been in default for most of the past 200 years. So it’s nothing new. Banks would be restructured and recapitalised by having the bondholders take a loss, or convert to equity. No taxpayer money is needed. This is what’s supposed to happen, but governments don’t want to go there. I think this is founded in basic incompetence. The people who should be leading this process, namely France and Germany, don’t have enough confidence in their abilities to come up with a constructive outcome. Probably for good reason. So, they try to avoid it. So far, this has been done mostly by issuing more government debt. However, as we are discovering, it’s hard to solve a government debt problem with more debt. They have already started to rely on the ECB’s printing press. This will likely become more pronounced as their ability to issue debt declines. The newest EFSF plan sounds nice on paper, but we’ll see what happens when you have to come up with some real cash. So far, the Italian government bonds, which is really what this is for, have barely registered any improvement.

You have written extensively about gold’s past role in the monetary system. Do you foresee a return to some form of gold standard? Is this desirable?

Nathan: It is becoming clear to a lot of people that the present system isn’t working. They are looking for solutions. The euro was supposed to be a solution. It was supposed to be an alternative to the dollar as a world reserve currency. That’s not working out so well. What about the Chinese yuan? The yuan is linked to the dollar. It doesn’t even trade independently, and hasn’t for the last 60 years. The Chinese have no experience running a floating fiat currency. Forget about the Japanese yen. It is becoming clearer that no bureaucrat-managed floating fiat currency is reliable for any sort of long term. They might have a few good years, and then there’s some sort of problem, and the central bankers don’t know how to fix it. Probably they are causing the problem themselves.

People remember, at some basic level, that the gold standard system worked. We have many decades, even centuries of proven success. It is not some goofy idea that some academic dreamed up while sitting on the potty, which has never been tested.

The main problem today is that there are very few people – almost none – who have the technical knowledge to establish and maintain a successful gold standard system. I say that it is like an airplane. We can all stand around and talk about how wonderful it would be to fly in an airplane. However, if nobody knows how to design, build and fly one, then we aren’t going to be flying anywhere. There is some specific technical knowledge involved. Obviously, the academics and today’s central bankers don’t have it. Fortunately, it’s pretty simple. It is much simpler than an airplane! When I wrote my book, I wanted to have a one-volume resource that anyone with a bit of technical skill, like a computer programmer or a financial analyst, could pick up and have everything they need to build a new world monetary system based on gold. Even 50 or 100 years from now. We really need a few more people with this knowledge.

Along with this, we need people who can express coherently the purpose and advantages of a gold standard system. For example, the primary purpose of a gold standard system, I would say, is to produce a currency of stable value. That’s it. That’s what it is for. It is a tool that you use to achieve that goal. If you read Alan Greenspan’s famous essay Gold and Economic Freedom, you’ll notice that he doesn’t mention this anywhere. This is not just an oversight. It is evidence, I would say, that Alan Greenspan, and the writers of similar polemics today, don’t actually know what a gold standard is for, or anyway don’t have a clear enough concept that they can express it in writing.

So, the main hurdle right now is this sort of intellectual hurdle. Once that is completed, and we are making good progress today, then the implementation will be much more straightforward. We will know what we want and how to get it.

Would it be possible and desirable for a country to transition to a free market in money – that is, one without government legal tender laws?

Nathan: Most countries have something like this already, at least informally. You can go to Honduras or Vietnam today and spend your US dollars at any shop or restaurant. Europe has had “eurodollars” for decades. It would be better if this was formally recognised, with no legal tender laws, fees or taxes on using whatever currency you like.

This is actually an important idea today, because we have to find some sort of way to transition from the dollar-centric world monetary system to whatever comes next – ideally a gold-based system. Unless the dollar itself gets a gold link, then there will have to be some sort of transition period from one to the other. During this transition period, I think it would be good to have the option to do business in whatever currency you like. Each person will be able to decide for themselves the timing of when they use one currency or another.

For example, let’s say you are a businessman in China, using the yuan. The yuan is basically linked to the dollar. The Chinese government can’t easily use a gold standard for the yuan today, because the extreme violence of the exchange rate between gold and the dollar would cause all sorts of commercial difficulties. However, at some point, people may decide, during the potential long demise of the dollar, that enough is enough. They aren’t going to get paid in increasingly worthless dollars (or yuan pegged to the dollar) anymore, they will demand payment in a gold-linked currency which was perhaps introduced earlier and has been circulating alongside in a minor way. So you see, if you have two currencies available, people can decide, based on their own personal circumstances, which one is best for them.

Another good element of the “multi-currency” idea is that it allows the gold standard advocates a little time to practice in real-world situations. People sense that the gold standard advocates are a little shy on technical knowledge, so they need some practice. Get a bunch of systems up and running, and let people work out the problems.

The State of Utah has already taken a step to assert their Constitutional rights and allow a parallel currency based on gold. Surprisingly, I think this will have less pushback from the Feds than you might think. They will probably look at it as a sort of odd curiosity, like the many “local currencies” already in place today. However, as you say, it is important that people can trade in these currencies without regulations, fees or taxes.

I am hearing a lot of positive interest in this sort of “multi-currency” approach, even from Keynesian types.

Part 2 of this interview with Nathan Lewis will be published in GoldMoney Analysis shortly.

Just when it looked like the bulls were in the ascendency, the Greeks have thrown the markets another “curve ball”: yesterday, the Greek prime minister George Papandreou announced that last week’s bailout deal will be put to a public ballot. A ‘No’ vote from the Greek people will likely mean the country defaults on all its debts, and could result in it leaving the euro.

The consequences of this to the rest of the eurozone – and by extension, the world economy – would be dire. As illustrated in this New York Times article, Europe’s web of debt means that the fallout from a Greek default will not be limited to the eurozone. Furthermore, if Italy’s debt situation continues to deteriorate – as seems highly likely given the direction of yields on Italian government bonds – then the situation will get even graver for the eurozone and the world economy. As one market analyst quoted in Britain’s Daily Mail notes: “Time to forget Greece, Italy is the most scary guest at this eurozone Halloween party.”

Unsurprisingly, stocks and commodities have both been pulled down by the news of a Greek referendum, while the euro has also fallen against the US dollar. Gold and silver prices have also lost ground, with the gold price looking likely to test support at $1,700 per ounce. The silver price could be on track to test support at $32.50. Very strong support exists for the gold price around the $1,600 level, with strong support for silver at the $30 mark and even stronger support down around $27 per ounce. Silver in particular will continue to suffer as long as bearish sentiment persists.

However, suffering equity and commodity longs may take comfort from the fact that today marks the start of Italian Mario Draghi’s reign as European Central Bank president. As we pointed out in yesterday’s commentary, the pressure on Draghi to resort to large-scale money printing was already intense, and this has now been made even more so by the Greek referendum news.

Will Draghi really risk the deflationary cataclysm that could be unleashed by a Greek ‘No’ vote, coupled with an Italian debt crisis? It seems unlikely, but many have been and continue to be surprised by the ECB’s reticence to resort to the kind of money printing that’s been seen in the USA, UK and Japan. Evenallowing for German sensibilities on these matters, the ECB’s monetary policy has been surprisingly tight considering the serious debt problem confronting the eurozone, and the fact that many of the most leveraged banks in the world are European.

Investors will receive important pointers as to Draghi’s position on Thursday, following his first ECB policy committee meeting. Confirmation that Draghi will pursue an “easier” policy than his predecessor Jean-Claude Trichet will encourage equity and commodity buying, and should lift gold and silver prices. On the other hand, if Draghi appears to endorse a tighter monetary policy than people have been expecting him to do, then equities, commodities, gold and silver will come under more selling pressure.