This column really is about what could happen to gold prices in the near future, but it’s going to take us a bit to get there, so hang with me. First I need to talk about cash.
There is a huge amount of cash sloshing around in the global financial system. Investors in places like Greece, acting in their own rational interest, have been looking around trying to find a safe place to put their cash. A lot of it winds up as foreign currency in banks in other countries.
That outflow of cash makes the government of Greece unhappy as it causes liquidity issues at home and, perhaps less intuitively, it makes the receiving country unhappy because it makes their currency more expensive. The process of moving one’s money to a safer country with more stable currency is one example of something called “capital flight”.
Now one of those countries, Switzerland, is very close to a deal to send cash from Greek investors back to Greek banks. These are very same Greek banks teetering on the edge of the financial abyss. If you’re a Greek investor trying to protect your assets, how are you going to react to that? If you guessed they’ll be bugging like their hair is on fire, that’s probably a pretty conservative description.
It gets better. If one country does that, there’s a really good chance more will follow. That domino-like game of global hot cash potato will not be an orderly process. Think of it like a parking lot full of 500 people involved in a giant drug deal where cash changes hands several times. All the people involved want their money and they all have guns. All it would take is one of those people in our hypothetical drug deal to start shooting to turn the whole thing into a giant blood bath.
What European commission has done, on an economic parallel, is to cock their gun and point it at Switzerland, telling them to give Greece their money back. The move by the EC has set everyone else on edge. Whether the shooting starts or calmer heads prevail remains to be seen.
What if the economic shooting does start? What if more countries play the repatriation card and start clawing back foreign investments? That actually brings us around to gold. A lot of that repatriated money will go into gold. Gold prices won’t just spike, they’ll go orbital. That could trigger some countries to ban gold sales or gold ownership.
How it all shakes out, I have no idea. It’s like trying to pick a winner at the OK Corral before the shooting starts. I’m confident to say if the situation deteriorates, it will be good for gold prices.