I meant to write last week about Greece Bonds paying 100% interest. But lost track of time. To many things going on. Anyway. What I wanted to say is that apparently potnetial bond holders of Greek Soverign debt are expecting an enourmous chance fo default. This is due to the fact that the bonds are paying 100% interest. Here is how I figure this.
If a 1 year $1,000 bond pays 10% interest it is paying $100 a year in interest. Two (2) payments of $50 ea. If this bond is to pay 100% interest then the bond must sell for $100 not $1,000. In 6 months the investor will get 50% of his orginal investment back with the interest payment of $50. In a year the investor would get another $50 + the face value of the bond ( $1,000). However, if the bond issuer defaults then the investor ends up with only his $50 interest payment (should they make it at the 6 month mark). Therefore, would you be willing to invest $100 to get $1,100 or $50? Sure, big gamble, but a payoff of 11:1 if they succeed. Therefore, I would wager that the chance of default is somewhere in the 90% range. 11:1 is approximatedly 10:1 which is equal to basically a 10% chance of success, 90% chance of fail. Going based on wager of $100 to payoff of $1,000 (not including interest) then we have someone willing to wager 10% for a payout. Not sure if this is how odds are really calculated or not but sounds good to me. Because I would have thought there was close to a 100% chance Greece would default.
The news this week then is that European Leaders are asking Greece bondholders to accept 50% write-downs. In otherwords, you will get only $500 on a $1,000 face value bond. If you invested the $100 to get 100% return then you will end up with $600 for your $100 wager (not investment, not at these terms). You are still getting a 6:1 return but no where near the 10:1 return you might have gotten. Your still making money though.
In addition this week saw Gold and Silver get a lift. Initially on Tuesday it was because the Wednesday meeting of European leaders and Finance Ministers was to take place but the Finance Ministers meeting was cancelled sending up massive "UNCERTAINITY" flags which caused metals to rally as safehaven buying commenced. On Wednesday, meetings were not going well and announcement fo the 50% buyback/payoff on bonds was announced causing further strength in U.S. Dollars and more safety seeking investors to buy metals. Today on thursdaty we see the U.S. Dollar plummenting causing U.S. investors to flee to the safety of Metals, while Europeans are feeling there is less "UNCERTAINITY" in their outlook now that plans have been announced on controlling Greek default. The plummenting dollar is outweighing the European sellers so the price of metals are still headed up.
I love the quote off Kitco.com's website in explaining this phenomenon
"Did gold really go up 8.30? No. It actually went down -18.45 in real terms, but US Dollar weakness makes it appear to have gone the other way." (www.kitco.com, 10 27 2011 11:18am CST)
Anyway, I think we will see some settling in Gold prices over the next few days, especially tomorrow going into the weekend. I would not be surprised to see Gold fall to $1700 and possibly back to $1650. I am still looking for a winter rally between now and Spring to move Gold back to $1925-$1950 and maybe over $2,000. For next year, I think we are going to need to start thinking about the real threat of Wage deflation which may translate into across the board deflation. If we see deflation then I think metals will be hurt and coudl see Gold falling back to $1500 and then $1250 before settling in around $1000. However, at this time I would give it only a 5-10% chance of this happenign with a 90-95% chance that we will see stable prices between $1750 and $2000 with possible upside to $2250, unless we get major inflationary news or continued QExxx in which case $2,500+ is possible Silver should move up to $40 an ounce with the potential fo $50 an ounce if Gold can make and maintain $2,000. On the downside, I would see Silver bottoming out at $15-$20 an ounce if Gold dropped to$1,000. Again, I don't expect that with lots of certainty, but it is possible.
Take care, and as always, Standard Disclaimer applies.
Mother