Choosing Sides: Gold, Derivatives, And East Vs. West

by: Bill Holter

Greece is pivotal to the survival of the euro, and big win for Russia should they pivot from the West -- a possible derivatives trigger!

Geopolitics are moving markets.

A line in the sand is drawn for Greece.

A pivot East by Greece could set off a derivatives chain reaction.

Last week was filled with geopolitics 24/7 until Friday, when they finally spilled all over the markets. The market action was extremely ominous, especially the last hour into the close. Very shortly, I believe we will be faced with huge market "gaps," which will be the topic for tomorrow. Today let's discuss how the current geopolitical situation will detonate the leverage.

It's not as if the geopolitical situation wasn't already hot enough before the Greek vote, now the world has a polarizing event to deal with. This past week was a sparring match between the Syriza party of Greece and the EU, a line in the sand has now been drawn: February 28. Before looking at all of the sides being chosen and alliances being formed, it is important to understand that "lines in the sand" are a very, very bad thing indeed -- especially when we are talking about nations. Drawing a line in the sand and placing a date on it means someone must lose face on one side or the other. Don't get me wrong, one way or the other, Greece will implode financially; it will open the floodgates for other weak Southern European nations, and ultimately destroy the Eurozone as we know it. But, now there is a hard deadline for all of this to occur. A Greek failure or exit will also set off a derivatives chain reaction. This is what I believe Friday's market action was portending.

The Euro/Greek fracas is not all there is; there is much more, including the Russia/China/India meeting, and the Russia/Iran allegiance. I will bring them in later; for now, let's focus on Greece, since the Eurozone has now declared them the "firing pin." Greece is a financial wreck. They have national debt-to-GDP ratio of 175% and rising, especially as GDP continues to collapse. They also experienced bank runs by the public over the last several weeks, which saw outflows of more than 10% of total deposits. Their stock and bond markets crashed this week as interest rates approached 20%. Greece will, mathematically, go down one way or the other.

Over the next 25 days, some philosophical decisions will need to be made, and none of them will be pleasant. In a nutshell, Greece wants its debt balances lowered in a "haircut" fashion and, the ECB cannot agree to this, as they would then have to admit losses and no longer be able to price Greek debt at ta ridiculous "par." The Troika wants to offer 7 billion euros as an extension package to prolong the game. Mr. Tsipras flat-out rejected this on Friday (thus the market action), and does not want to accept it; he is steadfast in lowering the amounts owed rather than taking more handouts and increasing the debt balances.

This is a true showdown, and one where no matter what happens, no one wins, because the losses have already taken place. Greece has already borrowed too much and cannot pay it back; the losses are already in place, whether or not they are admitted and acknowledged. Please understand that Greek bonds act as "collateral" within the derivatives daisy chain. Any write-down or write-off will be considered a "default trigger," where margin calls are issued to an already illiquid and undercapitalized derivatives chain. The financial system is in a position where calling a spade a spade will cause the roof to cave in, while not calling it a spade -- but instead ignoring the reality -- is the only thing keeping the game alive to this point!

Enter Mr. Putin and the Russians. They have offered aid to Greece should they turn East. This would be a disaster for Europe herself, as the next question would be: Who's next? The bottom line is this: As I said, the losses have already taken place. Are they recognized now or later?

One last point about Greece -- should they lean East, but stay as a member of the Eurozone and NATO, they can now veto any sanctions the U.S. would like to place on Russia -- ironic, in a very dark way, don't you think? Greece would be a huge win for Russia in so many ways, and an even bigger loss for the West in every fashion imaginable.

China, Russia, and India will meet Monday in Beijing. Can you imagine what will be discussed, especially after Mr. Obama visited India just last week? Will it go something like "whatever they offered you is either not best for you,or an outright deception"? Will India be offered a spot at the Eastern monetary table -- the future "big kids" table, if you will? Are they being given a heads-up on any timing issues, or even asked to lower their gold tariffs to put a further squeeze on Western vaults? Interesting stuff!

Switching to the Middle East, but again including Russia (and by extension, China), Iran and Russia seem to be dancing partners! This has very big ramifications when you look at it from the religious allegiance standpoint. Iran is Shia, which means they have a natural allegiance toward Syria. Russia also has reason to back Syria, as they do not want to see a pipeline built as competition to their own gas exports. Just a week back, Russia and Iran signed a military agreement, and Russia is also discussing constructing nuclear plants within Iran. Iran has also been invited to join Russia's new clearing system, which will compete with (i.e., be an alternative to) the SWIFT system. These are all major developments, and are now coming day after day after day.

Before wrapping up, we should mention that China has ratcheted up its imports of gold. The final two weeks of January were 70 tons and 71 tons. Should this be their new run rate, they will be importing 40% more gold annually than the world produces. Why are they ramping up imports just now? My personal guess is they know something is about to happen and want everything they can get their hands on as fast as they can.

To put this in perspective, in just two weeks, China has imported six times more gold than the COMEX even claims to have as deliverable inventory! In my opinion, COMEX will very shortly be relegated into irrelevance, as they simply do not have the product available for delivery. A two-tier market will result, and it is very possible to see large down days on the COMEX and huge up days in physical metal as traders begin to understand the true dichotomy between paper gold and physical gold.

We have watched over the last several months as countries jockey for position. Allegiances of trade, military, and finance have been created, and sides are being chosen. The key to understand here is that those announcing deals have nearly all been toward the East and away from the West. Clearly, gold is also moving to the East from the West. Once the sides are fully chosen, who do you believe will be making the rules? Gold -- and whomever owns it -- will have a voice. Got gold?

To finish, I believe Friday's closing action is merely a preview to gap openings in all directions one day in the near future. The world has been in the process of choosing sides for several years and it is now coming to a head. Many deals and alliances have been formed, and in case you had not noticed, the West -- led by the U.S. -- is losing influence as each new deal is signed. This is because the world wants fairness in trade; they want true and real settlement, which has not been the case since 1971.

We are moving toward gold being remonetized into the financial system, because this is what the world is demanding. Below, because it is so very true, is a quote from my mentor, which sums up the attitudes of most of the world, if not the entire world, excluding Britain and the U.S. Please read this and let it sink in thoroughly, because this quote will be the basis for what I write tomorrow.

They know money to be... gold. This fundamental difference revolves around what has been proven over and over again... that banker alchemy in whatever form, QE or otherwise, is nothing but theft... based on a fundamental lie... no matter what god they worship, gold is their one and only binding agent, because gold is money you can trust!
