Gold is a precious metal synonymous for being a safe haven asset. When there is volatility in currency markets or market turbulence, investors usually turn to gold. So during these tough times when Greece is in financial turmoil, one may expect investors to flock to gold, causing prices to surge. However in reality, gold is at a three-month low.
It seems to be that general market consensus on Greece is the majority of uncertainty is already priced into the market.
“Those expecting a major dip in peripheral bond market valuations (i.e. contagion) have been met with fairly muted moves.” tweet
Jose Garcia-Zarate, Morningstar
Furthermore, the current macroeconomic environment is defined by a time of dollar strength, which indeed means that gold should actually weaken due to the inverse relationship between gold and the US dollar. In 2008, the International Monetary Fund estimated that 40–50% of the moves in the gold prices since 2002 were dollar-related. In fact gold may go even lower if the euro keeps on depreciating, as investors would buy dollars to compensate for such.
“We fail to see how mounting tensions around Greece do anything other than reinforce U.S. outperformance over the euro zone.” tweet
Goldman Sachs
If we accompany this with the consideration that the dollar is well-known to be a safe haven currency it will just reinforce the fact that it is unlikely that we will see a rise in gold especially after it has broke through its three month low. An Analyst at Barclays recently said:
“In our view, the dominant issue for the gold price this year has been the prospect of a U.S. Federal Reserve rate hike.” tweet
If we were to compare gold to the Swiss franc we have a slightly different story. Investors have been pushed towards the Swiss franc particularly after results on the referendum when we received a surprising “No” vote. Due to the safe haven status, earlier this week the Swiss National Bank (SNB) had to intervene and actually weaken the currency.
Looking at the yen, analysts expected highly volatile markets over the referendum as investors move towards lower risk assets. We did get some movement into safe haven assets but these movements were limited. It seems investors still believe a deal may be reached but as time moves on so does their patience, and their patience could be starting to run out as we have seen some yen strength against the euro. We have just started to see some panic occur amongst investors as the yen hits its 6-week high.
The German Chancellor, Angela Merkel insists that it’s up to Greece to put forward their proposals this week so the situation can be dealt with. This is just another sign that people’s tolerance is running out and they want a decision to be made quickly. However with Greece’s finance minister, Yanis Varoufakis (who has admitted to have clashed with other Eurozone finance ministers) resigned, it may seem as if people’s patience wont have to be tested for much longer if a decision is agreed upon soon.
It is time to look forward to future data to be released in the US, as the dollar seems to be a major factor in the pricing of gold. Gold has been known to be the asset of last resort and its possible we are just not there yet. On the other hand, with the surprise “No” vote, maybe it’s possible that now it’s Gold’s time to come into play?
