Views on the how eurozone sovereign debt issue will affect gold are mixed across the board, which underlies how tricky that situation is to understand and price into the market. There are differing views on whether the completion of the Greek debt deal with the private sector is bullish or bearish for gold. Some see the deal as bullish for gold as it adds stability and could mean a turning point that the eurozone may finally be grappling with the situation. Others have said it’s bearish because it lessens the need for gold as a safe-haven.
Further, there are differing views on whether next week’s meeting of European Union officials will support or weaken gold prices. EU officials have just requested more austerity from the Greeks and there is concern this last-minute request will hamper the country from getting its much-needed loan in mid-March.
Those who are bearish said they think the market is ripe for a pullback, particularly as it hasn’t had much of a correction since the start of this year. Others point to some technical chart developments that suggest gold is due for a retracement.
gold is not acting like a safe haven. “Markets change and evolve and right now gold is trading more like a currency than the safe haven it once was. It’s correlation with the dollar (negative) and euro (positive) is very strong. It is also trading as a risk asset as well and this is evident as it rises and falls with equity markets now. Gold is correcting the rally from the 1520’s to the 1760’s. I expect more consolidative trade with a downside bias
Precious metals, along with most other markets, were caught in a “Greece fire” on Friday as a deal struck to get the country its second bailout appears to have been scuttled by last minute demands from European leaders.
Greece was set to receive its 130 billion euro ($170 billion) aid tranche when eurozone finance ministers said they wanted the Greek parliament to impose a package of cuts and reforms agreed with the EU and the IMF. Also Athens must find a further 325 million Euros in budget cuts by Wednesday, when the eurozone finance ministers meet again.
Greece has a bond payment due March 20 and needs its next aid supplement in order to pay bond holders. The new demands pushed financial market prices down across the board, market watchers said.
“Greece cannot service its huge debt, and there are real fears that a default could endanger Europe’s financial stability and even lead to a break-up of the eurozone
What’s ironic is that many European finance ministers are concerned this new overall plan won’t put Greece on a sustainable growth path, the firm said.
“This latest demand could be the lighting of the fuse that eventually sets off the default ‘bombshell’ that everyone is supposed to be trying to avoid. But there is now more and more talk on the margins in both Brussels and Athens that a Greek default would not be a disaster,” the firm said.
R.J. O’Brien said default is not necessarily what is causing international lenders sleepless nights. Rather, it’s a possible Greek exit of the eurozone. “If that happens then all Greeks – not just the government – will either default on their debts, or – if it is legally feasible – will convert their debts into new drachmas that are likely to lose over half their value against the euro,” they said.
Brown Brothers Harriman analysts said this latest move is fraught with peril. “Eurozone officials are playing a dangerous game, as opposition to austerity in Greece is surely intensifying, as evidenced by the resignation of the Deputy Labor Minister yesterday and by another socialist MP today. The poor Greek economic backdrop only makes it tougher to stick with austerity to meet fiscal targets,” BBH said.
George Gero, vice president with RBC Capital Markets Global Futures, and precious metals strategist, said there are concerns that the continued problems in Europe might push mid-sized and smaller banks to raise cash by selling gold. That’s bearish because it puts more gold supply on the market.
The lack of a plan for Greece also delays any recovery in that region, which could ultimately weigh on the global economy, he said. “The relationships of gold, euro, crude and base metals like copper are beholden to economic recovery which could be impacted by a Greek default,” he said.
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