Commodity Update, Gold – 09 February 2015

Grexit risks are rising, which should be supportive for gold over the coming days and weeks

After failing to sustain a break above the £1305 level in the wake of Greek elections in late January, gold has now retreated to below $1240, driven by a business as usual approach in Europe and strong payrolls numbers which emerged from the US late last week.

So far, markets have largely shrugged off the election of a radical Greek government, which has led many European equity indices to post modest gains throughout recent weeks, while gold prices have continued to fall.

However, negotiations between the Greek parliament and its European creditors are yet to produce any form of agreement on how the problems of Europe’s most troubled economy will be resolved. As it stands, Alexis Tsipras and Yanis Varoufakis have remained staunchly against the extension of the nations’ bailout program after having previously described it as a “form of fiscal waterboarding”.

This is while Germany’s Angela Merkel has also maintained her stance that there will be no debt forgiveness for Greece and that the nation will need to stick to the terms of its bailout agreement.

The result of this clash has now seen Greek ministers attempt to claim WWII reparations debts, which had previously been forgiven by Greece many decades ago, prompting an official response from the German government. Germany rejects Greek claim for World War Two reparations – Reuters


What does all of this mean for investors and financial markets?

While investors have, so far, gone unscathed by the ongoing dispute in Europe, the temperature at the negotiating table is now rising. WIth Greece having played out the WWII card, and Germany having opted to stand defiant, the risk of an escalation or marked deterioration in relations has now increased.

Like a car crash in slow motion, investors who have followed the evolving dispute closely will have noted statements made today by Greek ministers which appear to indicate that the nation is open to accepting funding from external sources outside of Europe.

Among those sources named, by the Greek Defense Minister Panos Kammenos, were Russia, China and the US.

While it remains to be seen whether or not the US would be willing to step in as part of an effort to prevent either Russia or China gaining a toehold in Europe, and access to a strategically important naval base on the continent, this most recent statement highlights just how much the stakes have now risen while underlining the lengths that the new Greek government is prepared to go to in order to get the right result.


The takeaway

With recent events in mind it doesn’t require a great deal of imagination to envisage a world where the after a sustained period of hard bargaining and without any form of deal from European “partners”, Greece does in fact find itself seeking funding arrangements elsewhere.

If Greece’s pleas for some form of assistance were to come to nothing, and ministers were to come away from the negotiating table empty handed, then this could be the event that provides the Greek people with the impetus to reconsider their long held position on remaining within the European Union.

Moreover, if alternative funding were to be made available to Greece by Russia or China, then without an intervening offer from somewhere like the US, this could seal the deal for the Greek people and mark the beginning of a slow but resolute turn for the nation from west, to east.

Such an outcome could have catastrophic consequences for the future of the European Union, by not just outlining an alternative future for other disgruntled European nations, but also by sparking a further prolonged period of uncertainty on the continent, followed by a deeper downturn in growth and potentially, further disintegration of the union.

While it remains far from certain that any of this will actually happen, we feel that the myriad number of possible adverse outcomes provide a supportive environment for gold demand and given this, we expect to see a recovery in spot prices over the coming days and weeks.

In greater detail, we would expect the metal to attract strong support at the $1222 level, before correcting higher over the coming week to target $1260 and above.

Spot Gold / 2 Hour Intervals



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