What the Coming Grexit Means for Resources

I don’t normally give you published analysis from Diggers and Drillers. But I’m feeling generous lately.

Last week I gave you analysis from Diggers and Drillers on why the gold price is on its way to US$931 per ounce or below this year. At the time, gold was trading at US$1,274 per ounce. It’s now trading lower, at roughly US$1,225 per ounce.

However, it must be noted, gold isn’t ready to fall off a cliff just yet. One issue remains — Greece.

This week I analysed what the coming Grexit means for the resources sector for subscribers of Diggers and Drillers.

Today I’ll share this analysis with you. Out of respect for the thousands of paid subscribers, this will be the last piece of direct research that I share from Diggers and Drillers for some time.

Why Greece will exit the Eurozone

When you’re analysing the world, you can’t look at anything in isolation. Analysts who tell you that resources will fly this year are talking their own book. The reality is that 2015 will be an extremely tough year for resource punters.

You can respond to this in two ways — 1) put your head in the sand and avoid resources; 2) be a contrarian investor and take advantage of the opportunities on offer. In my view, you should prepare for the resources bull market which will return in 2016. The right resource stocks will be seen as a hedge against ballooning government debt and geopolitical risk.

That said, we need to focus on what’s coming next — the ‘Grexit’. Most analyst reports suggest that a Greek exit from the Eurozone is unlikely. But they’re wrong. Greece will leave the Eurozone.

And it’s important that you’re prepared for the impact this will have on financial markets — particularly on gold and resources.

As a bit of background, Syriza won the Greek general election on January 25. Syriza promised wage and pension increases, free TV, free electricity, and no public-sector job losses. The utopian world is up for grabs.

Unfortunately, back in the real world, there’s absolutely no way that it can deliver its election promises without leaving the Eurozone. And time is running short. Syriza has to sort out its debt situation by February 25 or risk default.

Since the debt talks were initiated, Syriza has ruled out further austerity and rejected more bailout money. As such, the European Central Bank (ECB) cut off Greece’s funding ability from the previous program, which was arranged in 2012. That means Greece can no longer pledge its worthless bonds to obtain the necessary finance to pay the bills.

Following this, the ‘troika’ of Greek creditors — the IMF, the European Commission, and the ECB — gave an ultimatum to Greece. If it wants a debt extension, Greece must apply for one before February 16. Greece rejected the offer.

Greece owes roughly 320 billion euros. Greek debt is equivalent to 175% of GDP, roughly double that of any other EU nation. There’s absolutely no way Greece will ever repay its debt.

The sobering fact — one the mainstream will never tell you — is that the country is falling further into depression by the day. The new Greek Prime Minister, Alexis Tsipras, wants to put an end to the depression conditions. And he wants a 10 billion euro ‘bridge agreement’ to tie things over. But the troika is playing hardball and has said that it doesn’t offer ‘bridging loans’.

With that approach cut off, Tsipras opened a new front, demanding that Germany pay reparations for the damages wrought during the Second World War. Syriza figures the amount to be around 162 billion euros. Germany, not surprisingly, has refused.

The EU has no choice but to reject Greece’s demands. If they fold now, they’ll need to do even more for Italy, Spain, Ireland, and Portugal.

Once Greece plays its card and declares its intention to leave the Eurozone, Brussels and the troika will come to the table and suggest some new deal. They’ll be desperate to restore confidence in Europe and the financial markets. Keep in mind that Brussels non-democratic representatives have their jobs on the line…

What about the stock market and resources?

Until there is some certainty around the Greek issue, it’s likely that we could still see the Dow Jones correct back to the 16,500 point region. The Aussie market would follow. Financial markets don’t like uncertainty.

Gold may see a ‘pop’ to the US$1,350‒1,400 per ounce level. However, keep in mind that when Argentina defaulted on its debt last year, gold crashed — the suspense had gone! Business went on as usual. In this case, I wouldn’t gamble on the gold price seeing a temporary ‘pop’. If a ‘pop’ happens, it will be temporary at best…

Gold at US$931 per ounce or lower will happen this year. The buying opportunities will come at the right time for the patient few who wait. And I have a pretty good idea which stocks will outperform. Click here  and check out Diggers and Drillers if you want to know when to buy gold at the low and which companies will outperform in the years to come…

Coincidentally, the ECB’s one trillion euro money printing program will start around the same time as the ‘Grexit’. This money printing program is three times as much as Greece’s national debt.

The ECB, the buyer of last resort, will temporarily calm the storm. When the ECB prints money and buys sovereign bonds, bond prices will rise and yields will fall. Clearly, the ECB has enough money to absorb the coming selling frenzy and keep bond yields low.

Seeing lower yields, the mainstream will eventually report that the Eurozone will thrive without Greece in the future. The initial panic will subside…until the next Eurozone member runs into financial trouble, though I don’t expect to see another ‘Greece’ like issue until late this year or early next year.

As I’ve been saying for months, debt markets are dangerous. This is the start of the debt to equities switch. The Dow Jones is fast on its way to 26,100 points this year. The ASX will follow. This hunt for yield will destroy the egos of gold bugs.

We’re at an important stage for resources markets.

Once the euro starts to fall apart, the US dollar will truly skyrocket.

The bullish US dollar is a very serious risk for resource punters this year. As resource prices are denominated in US dollars, mathematically, they will fall.

I’ve shown this graph before, but given its importance, I’m showing it again. It shows the inverse relationship between the US dollar index (red line) and commodity prices (blue line) from 2010 to 2014. You can see they’re almost a mirror image of each other.

Source: Allstarcharts.com

Since the end of November 2014 — shortly after this chart was printed — the US dollar index is up nearly 10%! Resource prices have been hammered across the board. Unfortunately, this is only the beginning.

Be prepared for the crash in resource prices. There are tremendous buying opportunities coming your way this year. Buy and hold quality stocks this year and you will be rewarded in the coming years. I’m in the process of recommending you the bargain opportunities as they cross my desk.

I want to remind you about something important. A Greek exit won’t mean that financial markets will fall apart immediately. It takes time for the house of cards to collapse.

It was just over a year between the first US bank collapse (Northern Rock) in 2007 and when the financial meltdown of 2008/09 escalated. Similarly, we’ll see the sovereign debt defaults wipe out markets in 2016/17. Equities and resources will outperform. Get your portfolios ready…

The bottom line: Be a contrarian investor and buy quality resources whilst you have the opportunity this year. This is a once and a lifetime opportunity that you have to restructure your resources portfolio to make massive gains in the years to come.

Don’t just hold resources and gold exposure and cross your fingers. If you’re interested in receiving this kind of exclusive and topical analysis on a regular basis and actionable advice on what to do, you can check out my full analysis here.


Jason Stevenson,
Editor, Diggers and Drillers

Editor’s Note: This article originally appeared in Money Morning.

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Jason Stevenson

Jason Stevenson

Jason Stevenson shares his extensive knowledge of Australia’s mining sector as Markets and Money's dedicated resource analyst. Whether it’s iron ore, gold, copper or lithium, you can rely on Jason to give you in-depth analysis of the biggest and most important sector of our economy. Jason provides in-depth research to Resource Speculator, Australia’s premier resource investment advisory.

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