How Will a Greek Exit Affect Gold?
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The bets are running high on the speculation around the possibility of Greece exiting the European Union, AKA Grexit. How might such an event might affect the price of gold and by extension SPDR Gold Shares? Let's examine this issue:
In recent weeks there have been a lot of headlines revolving around the Greek debt crisis. The recent elections that weren't successful to form a new government only further added to the distrust by many that Greece won't be able to sustain the austerity plan its previous government had agreed to. The upcoming reelections in Greece to be held on June 17 might be the tipping point if the elected parties won't be able to agree on keeping the austerity plan and won't regain the trust of the EU community.
There are many, such as the IMF Chief, who warn this exit will have extremely expensive ramifications on the Euro Zone. One of the reasons many fear this Grexit is because they don't know the ramifications, and the level of uncertainly of such an event is high.
But if the Greeks won't be on board of the EU plan, it will not receive additional bailout funds which will bring the nation to bankruptcy. Such events had occurred in the past (e.g. Argentina) and even though the circumstances were different (they are always different) things weren't as bad as many had anticipated.
Currently the once tabooed issue of Greece leaving the EU is on the table.
Let's see how the market is reacting to the possibility of Greece exiting the EU with respect to the price of gold and the Euro:
During last month, gold tumbled down by 6%. Furthermore, during May the SPDR Gold Shares (NYSEMKT: GLD) also fell by 6.3% and reached by June 1st 157.5, which is very close to its low rate for 2012. During the same time the Euro has tumbled down to its lowest level in nearly two years; the Currency Shares Euro Trust (NYSEMKT: FXE) declined by 6.5% which is near identical to the decline of the Euro/USD. There is an excellent analysis on the how to trade the Euro with respect to a potential Grexit.
The Euro/USD is strongly and positively correlated with the daily percent changes of gold (and by extension GLD) as indicated in the chart below. This means that it the Grexit will take place which will bring further down the Euro/USD in the short run, and the current relation between bullion and Euro/USD will hold up, then gold is likely to further decline in the near future.
Furthermore, as long as the uncertainty levels are running high, people are likely to seek out safe haven investments such as U.S Long Term treasury bonds.
The recent uncertainty in the financial markets could explain the ongoing fall in the U.S 10 year treasury yields in recent weeks.
Since gold has become less of a safe haven investment than it once was, I speculate the high uncertainty in the markets with respect to the European Union and Greece is likely to further adversely affect the precious metal.
This GLD and Greece Debt Crisis report was first published on Trading NRG
For more on this subject:
Gold and Silver Weekly Outlook for June 4-8
Gold and Silver Outlook for June
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