We've been asked by several Subscribers to comment on the probable outcome of tomorrow's voting in Greece and on the likely impact that this could have on the precious metals prices.
In short, the rest of the EU promised to help Greece, but only if the latter introduces much more restrictive fiscal policy (increasing taxes, decreasing gov't expenses) and tomorrow there will be voting whether or not to introduce it. Taking this restrictive step is in fact necessary for the country not to default, but many Greeks simply don't view this as important as long as they don't have to cut down their spending for a while. So, on one end Greek politicians are "forced" to comply with EU suggestions, but on the other hand might be willing to please voters by giving them some more time for consumption.
In our view, the likely outcome is voting for the restrictive fiscal policy or voting against it only to be followed by some other (not so hyped by media) way of complying with EU requests. In other words, we believe that in the end Greece will receive more help from the EU.
Without help from the EU country will be in much bigger trouble than it will be in if Greece accepts the savings plan. Tourists contribute to about 1/5th of Greece's GDP and over 90% of tourists in Greece are European. Therefore, this country would be particularly hit by the possible bankruptcy and perhaps being thrown out of EU as it would create obstacles for tourists, which would be tempted to visit other countries in the region instead.
Additionally, it's easier from a political point of view to try to explain to average citizen why it was absolutely necessary to take steps that will temporarily decrease their ability to spend money, than it would be to explain the opposite to the EU economics pros. So, in a way, Greek gov't chooses between being practically sure that EU will not help them (bankruptcy) and perhaps having to deal with people's dissatisfaction (they are already dissatisfied).
Gold appears to confirm this theory as it has been moving lower recently even despite increase tensions regarding the voting. Normally one would expect gold to "buy the rumor and sell the fact" meaning that gold would move higher ahead of the voting on increased excitement/fear and then decline once things settle down. However, we're seeing gold declining even despite aforementioned pre-event tensions. This is not a good sign and it makes us believe that further declines are on the horizon.
Summing up, downside targets that we have featured previously remain unchanged and we continue to believe that the precious metals market is going to move lower in the following weeks (naturally brief corrections may be seen along the way).
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Sincerely,
Przemyslaw Radomski
