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Alastair Ford: The not-so-golden opportunity offered by Greece

Published: 11:00 17 Jul 2015 BST

goldeuro
The gold price in Euros is significantly up and that’s a trend that looks set to continue.

Why has the gold price not reacted more dramatically to the economic uncertainty generated by the Greek crisis?

One school of thought says that gold needn’t react because the risk isn’t the same as it was five years ago when the issue of Greek insolvency first rose to prominence.

Back then, at the beginning of 2010, when the first rumblings began to be felt, gold was actually trading at a slightly lower level than it is now.

But the momentum was clearly on the upside.

Within the space of 18 months, as the sovereign debt crisis raged, gold price had spiked to over US$1,800 per ounce.

For gold bulls, that represented a vindication. For years, they’ve argued that gold is the one essential hedges against global economic woes.

But there was more to it than just Greece.

In the background one of the largest programmes of money printing the world had ever seen was running full tilt - the stimulus of the US Federal Reserve, which had begun late in 2008.

So, by the time the Greek crisis really began to rage in the summer of 2010, after Standard & Poor’s lowered the country’s credit rating to junk and rioters had hit the streets, the US had already tripled the amount of treasury notes on its balance sheet to US$2.1trln.

So was it Greece or the QE that moved gold?

It was never clear. But recent events certainly seem to shed some light.

At one point at the end of last week, a Greek exit did seem a real and short term possibility.

But gold barely moved.

In 2010 the Greek uncertainty and the number of ‘unknown unknowns’ was greater then than it is now.

But the crucial point was that there were exponentially more dollars circulating in the global economy, and exactly the same amount of gold.

Hardly surprising that the price of gold went up.

The number of dollars has now stabilised, so has the gold price, and the idea gold has acted as a hedge against global economic uncertainty surely needs a little bit of modification.

What gold in fact has acted as a hedge against is global economic uncertainty as expressed by US dollar weakness.

And that deliberate policy of keeping the dollar weak is now coming to an end.

There is open talk of interest rates rising soon and, although no-one’s yet sure of the precise timing, some pretty clear pointers are being given.

Fed chief Janet Yellen testified to the US House of Representatives Financial Services Committee that rates will likely to rise “at some point this year”.

To be fair, she warned too of the risks posed to the global economy by the situation in Greece, and of the ongoing uncertainty in Chinese markets.

And it’s also worth noting that the US-dominated IMF has come out against the raising of interest rates until early next year.

But be that as it may, it looks like that within the next 12 months or so the US will be raising interest rates for the first time in 10 years.

This development is not being lost on the world’s community of financial analysts.

“The yellow metal remains vulnerable as it sits precariously near recent lows,” commented UBS in a market note earlier this week.

UBS economists now put the chance of Greece exiting the Eurozone at 30%, down from 45%-50%, and they reckon China is still on course for 6.8% growth this year, in spite of the recent stock market wobbles.

UBS also notes that there has been some renewal of interest in gold exchange traded funds (ETFs) of late, although not in huge volumes, while SP Angel offers the opaque comment that gold is currently being sold to cover “other funding issues”, presumably shoring up positions with exposure to Greece.

All told though, none of this adds up to the picture envisaged by one leading online mining publication earlier this year, that the threat of a “Grexit” would lead to a “resurgent gold price”.

On the contrary, the further down the road the can is kicked, the more time the world’s stronger economies seem to be buying themselves to fix their own economies.

In the case of the Anglo Saxon economies that seems to be working reasonably well, although there remains to be a day of reckoning of some sort in the Eurozone.

The US is on the move and interest rates in the UK could be going up fairly soon too.

All of which explains why the gold price in dollars and pounds down on the year, while the gold price in Euros is significantly up. That’s a trend that looks set to continue.

 

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