Gold generally rises with uncertainty and desperation – two things in no short supply right now in Europe – yet gold can’t even make it back above the psychologically important $1,200-an-ounce mark. Why is that?
- Greece doesn’t matter nearly as much as the mainstream press would have you believe. The Greek economy is about the same size as the economy of Atlanta, Georgia.
- Since Greece won independence from the Turks in the 1830s – just under 200 years ago – it’s been in default for roughly 90 of those years so what is happening again is absolutely no surprise.
- Roughly $313 billion of outstanding Greek debt, only about $45 billion – or 14% – is owed to the International Monetary Fund, the European Central Bank, and Europe’s rescue fund, the European Financial Stability Facility and these public institutions can better absorb any losses.
- Finally, and most importantly, the Greek crisis has kept the euro weak against the dollar. That’s a major problem for commodities because commodities prices have closely tracked the euro’s strength versus the dollar going back to the start of the single currency (see chart below). A strong euro tends to mean a weak dollar and a weak dollar tends to mean higher commodity prices. The reverse is also true, however, so as long as the euro remains weak against the dollar, commodities – including gold – will continue to suffer.
As such, as long as the Greek crisis keeps the euro weak… don’t expect fireworks from gold.
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