After the gold price has risen on last Friday to a new annual high, gold could advance further to the next psychological mark of 1,200$/oz. But investors should be cautious. Because it is not the usual fundamental factors that have led to the rise in prices, but because of panic on Greece national debt. If markets return to a sober analysis, then gold could follow the fundamentals and give back the gains.
As stated earlier, the crisis of the high Greek budget deficit is a burden for the euro and is thus negative for the gold price. But it could become a supportive factor once gold is bought up in panic over a bankruptcy. Exactly this situation has occurred in the past week. And with these movements in the markets, two prevailing assumptions have been refuted. When asked during the recent ECB press conference to comment on the market development, ECB chief Trichet replied that the markets were always right. But this is not the case. Central bankers consider themselves infallible. However this statement of Mr. Trichet is obviously not correct. Second, it is often said that information would be processed rationally by the market, and thus academics in their models assume the hypothesis of rational expectations to be confirmed. They were already proofed wrong in the financial crisis and it is not true also in the panic of investors in the past week.
A panic can then be viewed as a rational behavior when it is triggered by new information that is true and leads to a completely new fundamental assessment of the situation. However, if the new information could be easily identified as false, a panic is an irrational behavior. In the case of Greece the panic was triggered by a message from Market News International that according to an unnamed government source, Greece's would refuse to ask the IMF for a loan because of possible conditions, but would try to negotiate a new assistance pact with the EU Heads of States. Greece's Finance Ministry has denied this report, but this has only strengthened the panic in markets. Obviously, the fear of some investors has switched off their brains.
If the markets really process information rationally, they would have quickly classified this message as a hoax and the denial of Greece must be regarded as accurate. The German Federal Government with its rigid stance pushed through an agreement at the summit of EU heads of government on March 25-26, that Greece take a loan from the IMF, before the other EU countries must determine by a unanimous decision the emergency and could grant loans to Greece on market terms. This is the lowest common denominator the various EU states could agree on, and it is not even guaranteed that Greece actually would obtain aid from the EU. For their stance, Chancellor Merkel has received the name Madame No. The attempt to achieve a better result in new negotiations for Greece would be like the battle of Don Quixote against the windmills. And both the Greek Prime Minister and Minister of Finance acting wise enough not to take up this fight. If the market were truly rational, then it should have realized the message of Market News International quickly as a rumor deliberately scattered and it would not have panicked.
Certainly more serious, however, are reports that Greek citizens reduce their deposits with the banks. They have already reduced their deposits within the first two months of 2010 by over EUR 8 billion and this trend has intensified in recent weeks. Part of these funds should have landed on accounts with foreign banks, or held as cash. One part could have flowed also in gold, although there is no hard evidence for this. If you look but to the intraday movements of the gold price, it is noted that physical gold demand in Europe has not had a big influence. The significant movements have occurred with the start of trading in the US. Recent data from the CFTC on the "Commitment of Traders" covers only the positions to Tuesday April 6, the day the panic broke out. But already at that time, the net long position of major speculative addresses increased by almost 30 thousand to 203,446 contracts. It should therefore once again be the hedge funds that have speculated on an escalation of the Greek crisis and a run on gold. With a calming of the situation, they could also reduce their positions again rather quickly.
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