Gold and Energy Advisor
Gold and Energy Advisor's Real Wealth

Real Wealth #310  05/23/2012

The Dow Jones Continues to Drop as Greece Approaches Default!

100 Billion Euros Secretly Pumped In To Prevent Greek Financial Armageddon!

Why Oil Prices Could Drop to $75 a Barrel as Greece and the Euro Zone Struggle for Survival


First, I am issuing an urgent market update tomorrow on the oil, gas, financial markets and how we intend to trade our model portfolio tomorrow that absolutely no Gold & Energy Advisor subscriber can afford to miss!

The need for a substantive review of the markets and our trading strategy is being driven by the growing specter of devastating financial crisis being triggered by a Greek default.

The uncertainty is wreaking havoc on Wall Street and throughout the world’s financial markets today. The Dow Jones and majority of the world’s equity markets are off substantially again today.

The danger of a legitimate banking panic that shakes the world’s financial markets is growing and must NOT be ignored.

The flight of cash has been so dramatic that The Financial Times of London is reporting that Greece’s banking system is being propped up by an estimated €100 billion or so of emergency liquidity provided by the country’s central bank — approved secretly by the European Central Bank in Frankfurt.

So far the report has not been confirmed by the ECB or the Greek central Bank. What is known is the country’s banks are being hit with such massive withdrawals by Greek citizens and foreign investors that are concerned that Greece will be forced to leave the Euro zone and that would trigger a banking panic and financial Armageddon.

There has already been substantial ECB assistance to Greece via  “emergency liquidity assistance” (ELA) to help the nation’s banks hold on while members of the Eurozone work to head of a full fledge banking and financial crisis. This assistance has been over and above the normal supplies of liquidity and is rumored to be temporary facility for national authorities to use when banks hit problems. The fly in the ointment is the ECB has complete control and discretion over any monies or facility and as a result could literally determine whether the Greeks will have any chance of saving their economy from even worse financial turmoil.

The ECB has been extremely stingy with information in ever emergency situation that has arisen in Europe....

“You don’t say when you are in an emergency situation, because then you make the situation worse. So I really don’t see the usefulness of being more transparent,” Luc Coene, Belgium’s central bank governor, explained in a Financial Times interview this month.

The Financial Times reported that the ECB let its guard down last month when it released its weekly financial statement on April 24 in which it listed an unexpected €121 billion increase under a benign heading titled “other claims on euro area credit institutions,” the result of putting all ELA under the same item.

By scouring ECB and national central bank statements analysts, have since pieced together more details. Analysts at Barclays, for instance, reckon Greece is now using €96 billion in ELA, with Ireland accounting for another €41 billion and Cyprus €4 billion. If correct, total ELA in use has exceeded €140 billion — more than 10 per cent of the amount lent to Euro zone banks in standard monetary policy operations.

Because of the risks of extra liquidity creating inflation, ELA in excess of €500 million requires approval by the ECB’s 23-strong governing council: its use can be stopped if two-thirds of the council oppose an application.

Importantly, the risks fall on the relevant national central bank, rather than being shared across Euro zone central banks as with normal liquidity — although there would be a general hit if a country left the Euro zone. However there is no theoretical limit to the amount of ELA that can be provided – and no information, for instance, what collateral recipient banks have to provide as security or what interest rate they pay. Ireland’s example shows that the supposedly temporary use of ELA, can also be prolonged.

During the past three years the ELA had to be cut off for a great many banks that became insolvent. The entire purpose of the ELA is to provide emergency liquidity assistance – not solvency assistance. The secrecy surrounding ELA creates grey areas, however.

Just this past week, demonstrating the worsening situation in Greece the ECB council excluded four Greek banks from ordinary liquidity operations — forcing them to fall back on ELA. The unofficial reason was political uncertainty over Greece’s bank recapitalization plan after the country’s inconclusive May 6 election.

But where would the council draw the line? Mario Draghi, ECB president, would probably seek political cover before Greek ELA was withdrawn. Although the ECB’s “strong preference” was for Greece to stay in the Euro zone, the country’s future was for politicians to decide, he said last week.

“Cutting off ELA would be the way to push Greece out of the eurozone — if that was wanted, or if Greece really wanted to leave. But I don’t think the ECB is going to take that decision,” said Laurent Fransolet, Barclays analyst. “I think the ECB would go to the political powers and have them take the decision”.

Nevertheless, ambiguity over how the ECB would really act gives it sway over eurozone politicians. An ECB threat in late 2010 to pull the plug helped persuade Ireland to accept an international bailout plan. No doubt, its governing council will hope to concentrate minds similarly in Athens.

There are a great many hoping that Greece hangs on and remains in the Euro but doing so will mean the nation would have to stick with austerity measures being largely imposed by Germany.

The Impact on the Oil Market cannot be ignored!

Oil tumbled below $90 a barrel in New York for the first time since November after government report showed that U.S. crude supplies rose to a 22-year high and as European leaders meet to discuss the euro region’s debt crisis.

“I’m looking for prices to fall to the mid-$80s and eventually test last summer’s low of near $75,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in Chicago. We’re heading lower because supplies continue to rise and the dollar is surging against the euro, hurting all commodities.”

The reality that we can’t ignore is a Greek default would not just set off a financial panic in Europe it would most likely worsen economic activity to the point that demand for crude oil would be impacted, With reserves at 22 year highs, the price of oil would literally have no way of holding current levels. As a result I expect to be extremely wary about taking anything but short positions in oil stocks in our Gold & Energy Advisor portfolio for the time being. At current time we have 1 long and 6 short put in our model portfolio. Tomorrow, we will update our readers on our both the oil and gas markets as well as our strategy for trading oil stocks going forward for the next few months, as well as our long term view on these markets and our trading recommendations.

We believe we can not only profit from the ever darkening clouds in the financials but actually rack up some enormous profits!

Please don’t miss my critical update tomorrow!

Best Wishes,

James Di Georgia

Editor / Publisher


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