Time to Have a Closer Look at Gold

If this is the calm before the storm triggered by the Greek crisis, the current price level of gold is

Gold has been stuck in a range over the last six months and is currently still trading near the lower levels of $1160 – $1170, as it has been under a lot of pressure mostly related to the tremendous US dollar strength. Furthermore, it has even failed to experience a lift-off during the past two Mondays following the dramatic developments in Greece, as one would expect that investors would resort to the precious metal representing a safe haven during these times of uncertainty.

More specifically, last Monday was the day after the shutdown of Greek banks and the imposition of capital controls were announced as debt negotiations fell through, resulting in a default of Greece’s loan repayment deadline of June 30th.

Yesterday was the day after the Greek voters said the historic ‘NO’ to more austerity measures during last Sunday’s referendum.

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Both events were apparently perceived by investors as relatively isolated incidents, not significant enough to spread an epidemic to the rest of Europe or the global markets, and therefore there seems to be an unusual calm across markets, suggesting that there is no need for flight to safety, at least not yet.

It may very well prove to be the calm before the storm, however, as the odds of a Grexit happening in the immediate future have significantly increased; if no common ground is found between Greece and its creditors this week regarding a new deal that will involve debt restructuring/relief, the implications could be severe. In such an event, European markets will enter a period of spiking volatility, while investors will turn to safer assets.

Even in the opposite case, where some form of deal involving debt relief is reached, the likelihood  of contagion to other European countries of the South is imminent further down the road, as a precedent will be set for other countries to follow Greece’s example and demand for ‘debt forgiveness’ or a reduction of their debt. Either way, it is therefore likely that markets will soon be entering a period of uncertainty that will trigger the buying of hard assets with gold being the key player.

Although we have already experienced some strengthening of gold against the euro, due to the developments unfolding in the next few days, gold is poised to start moving higher against other currencies as well signalling a flight to safety, and it could attempt once again to break the psychological level of $1,200. As markets start to digest the developments, this move can even extend to significantly higher levels, depending on the magnitude, as well as the duration of the spill-over resulting from the Greek crisis.

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