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Over the week-end, the Greek people voted in favour of rejecting the Europeans’ bailout offer. Although the Greek government was careful to stress the referendum was not a vote on staying or leaving the Euro, for the first time in these negotiations, I think the dynamic duo of Tsipras and Varoufakis have made a strategic blunder. They have overplayed their hand in terms of their confidence of renegotiating a new deal with the Europeans. Their whole selling point to the Greek people went something like this: once we called the referendum, the Europeans put forward an even better deal, therefore give us the ‘no’ mandate, and we will get an even ‘better-er’ deal. Although the Greek government are tough negotiators, I think they have finally over done it. For a nation on the brink of financial collapse, their arrogance is unrivalled:

CNBC Reporter: “If it is a no vote, how quickly do you think you can get a deal?”

Yanis Varoufakis: “24 hours”

They have convinced the Greek people that a better deal is coming. This will bite them in the ass. The last thing the Europeans (or at least the Germans) will do is roll over and hand the Greeks everything they are asking for just because they had a referendum. If anything, they should offer less given the very dangerous precedent the Greeks have set. Can you imagine the ramifications to the Germans if they allow this strategy to work? Every poorly performing European Union country would hold a referendum tomorrow. No, the Germans need to make sure this Greek referendum strategy is not viewed as a negotiating success.

The Germans do not even have the authority to negotiate with the Greeks anymore as it expired with their final offer. For the Germans officials to even return to the negotiating table, they have to get approval from their elected government, which has already disassembled for the summer break. So when Varoufakis says he will have a deal in 24 hours, it is such a piece of bull shit, I don’t even know how to react.

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I am disappointed in the Greek government. Although I think the Greek people should have voted ‘no’, it should have been represented honestly. Tsipras and Varoufakis tricked their countrymen into the ‘no’ vote. Whether they will be able to deflect the blame to the Germans when the time comes for a Grexit is another matter, but there is no doubt in my mind they have purposefully misled their people.

The ‘no’ vote was a vote to leave the Euro. There is no two ways about it. Now you might be of the same mindset as I, and think this is ultimately in the Greek’s best interest, but let’s not pretend otherwise. There will be no deal. The Germans will not bow down to the will of the Greek people. The Germans have already felt the Greeks were pushing their luck. Let’s not forget that Alex Tispras’ first act as Prime Minister was to visit a war memorial where Greek resistance fighters were slaughtered by Nazis in 1944. At every turn the Greeks have tried to reframe the narrative and make the Germans the bad guys. And they have been remarkably successful. But there reaches a point where enough is enough, and that line has been crossed.

Germany will walk away and allow the Greeks to hang themselves. The Greek banking system is a mess. Their economy is grinding to a halt. People are beginning to go hungry. Social order is starting to break down. To think that Germany will throw them a lifeline is foolish. I suspect Germany will do everything in their power to stop Mario Draghi and the ECB from keeping them afloat.

Who knows if Mario has the chops to stand up to the Germans. He isn’t exactly the toughest of characters.

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Over the short run, the ECB will be the only game in town for the Greeks. Whether they can cushion this fallout remains to be seen. So far the market has been remarkably nonchalant about the whole affair, and it up in the air whether this is because the contagion is ring fenced, or whether everyone still assumes there will be a last minute deal.

Don’t expect anything to get better anytime soon. Whereas before it was in Greece’s interest to drag this whole affair out as long as possible, given the perilous condition of the Greek economy, it is now crucial they get a deal as soon as possible. But since they have already rejected the last offer from the EU, I don’t see how a deal is achievable. Germany will not bend, especially with time on their side.

Now maybe leaving the Euro was Tsipras’ plan all along. I have long argued that the Greek economy will be much better off without the shackles of the Euro. In the 1930s the countries that waited latest to devalue ended up hurting the worse. There is a definite first mover advantage to this game of competitive devaluation.

But don’t get fooled by the idea there will be a negotiated deal in the coming days. A Grexit is now my base case scenario.


No, it is not some big conspiracy

Last autumn when the Ukraine situation was slipping into a full fledged civil war, gold was mysteriously weak. Instead of rallying on the geopolitical instability, gold declined to new lows. It made little sense. All the gold-bug-tin-foil-hat guys blamed the “big bullion banks” who were “conspiring to keep gold from exploding upward.

I don’t subscribe to their theories one iota. I don’t give the Central Banks and the “bullion banks” enough credit to be smart enough to orchestrate a multi-year suppression of the price of precious metals. If they were indeed shorting all this gold to keep the price down, then why wouldn’t some large player (like China) simply accumulate all the gold and then squeeze them? Ultimately prices go to their natural equilibrium. You cannot keep prices down for years and years with just short sales.

Although I don’t think there is some nefarious conspiracy to keep the price of gold down, I do not believe that market players are transparent about their buying and selling. Often it is not in their interest to publish their intentions in advance. It is only in hindsight that it becomes obvious what happened.

In the case of last year’s move lower during the Ukraine conflict, it is now clear that the government of Ukraine was selling to raise cold hard cash (ZeroHedge – Ukraine admits its gold is gone: “There is almost no gold left in the Central Bank vault).

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Even though it made little sense, there was a valid reason for gold to decline in the midst of the geopolitical instability. And that reason was not Central Bank suppression.

Fast forward to today’s gold action. It is once again terrible. You would think the Greek financial crisis would put a decent bid to the precious little yella’ fella, but it is once again sucking wind.

The gold bugs are still railing about the gold suppression scheme, but ignore them. The more likely answer is right in front of us. Greece has a huge stock pile of gold.

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If your economy was collapsing in front of your eyes due to the lack of short term liquidity, what would you do? You would sell anything you could. And what is easy to sell in size? You got it – gold.

In another peculiar development, JP Morgan and Citigroup have recently announced a dramatic surge in over the counter precious metals derivative exposure:

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If I were to guess, this increased exposure is the result of a Greek synthetic sale of their gold. The Greeks need cash, so they entered into some large OTC derivative sales with JP Morgan and Citibank. To the gold bugs it looks like these large “bullion banks” are conspiring to keep prices down, but in reality, they are probably just hedging their large purchases from Greece.

I am not fussed by the recent gold weakness, I view the unexplained slump as most likely temporary. Someone needs short term liquidity, and they are selling their gold. That is why you own gold in the first place. Yet I can’t help but be reminded about the old trading adage that during a crisis, you sell what you can sell, instead of what you should sell. In the coming months and years, I suspect the seller will regret taking the short term easy way out.


Interest rates aren’t the only asset class trading at negative prices

In another sign of the messed up markets we are living with today, recently the price of Canadian propane joined the negative price club. Last week propane for delivery in Edmonton, Alberta (Canada’s energy province) was quoted at –3!

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That means you need to pay someone to take the propane off your hands. Although I am sure this is a temporary phenomenon, it does not bode well for Canadian energy producers. Things were already bad enough without negative prices. It is tough to make money when the commodity you are selling has a negative sign in front of the price…

Thanks for reading,

Kevin Muir

the MacroTourist