question, page-2

Reiner,

The Australian dollar is a commodity currency, that is, a currency whose fortunes are linked to the price of the commodities that we export including, but by no means restricted to, gold.

This means that the full effect of a raise in the prices of the commodities that we import may not be fully passed to us. For instance, the price of fuel does need to go up when it goes up in USA dollar terms, something that is good.

However this situation also precludes us from benefiting in full from any increase in the price of Gold, specially when such increase is solely due to a fall in the US dollar.

Greece, as it cannot value its currency vis a vis the rest of the eurozone, is in a de facto gold standard and has to adjust (regain its competitiveness) by deflating and this is very hard to do. (Greece not only borrowed too much, it also cannot export)

They have been for the last 3 years in a depression and most likely will have to remain on that state for another 10 years or so.

They can opt for leaving the euro, but that alternative will also be disastrous for them with bank runs and financial chaos turning their lives into hell.

That Greece is going to have to default is a given, with the only question being who is going to pay for the losses and who else may also follow in their steps, with Portugal being the most logical candidate.

However, a partial default by Portugal and Greece or even a full default by Greece can be managed. The problem is if the markets panic and go also after Italy and Spain knowing very well that these two countries are also in a de facto gold standard.

As the printing of euros is not an option, a default made bit by bit through inflation cannot also be an option; a fact that has been leading the markets to think that if a default has to come then it will come in the form of a large single blow. And if that it is what the markets think, interest rates have to be pushed up and more the interest rates are pushed up the more the chances of a default increase and more the chances of a default increase the more the interest rates have to be pushed up, and so on until the country has to end, indeed, by defaulting unless, like Portugal and Ireland and Greece, their debt is taking out of the market by an entity like the EFSF borrowing the money on their behalf.

To my understanding the biggest cost component in mining is still the cost of labor, and labor costs are sticky, that is, they tend not to move down. Therefore any appreciation of our dollar or any fall in the price of gold is bad for our gold miners as their output is sold not in our dollars but in US dollars leading their margins to shrink, and when margins shrink you already know what happens.


Cheers