Eurzone debt crisis still moves gold price

The situation in Greece gets more and more severe, despite the eurozone finance ministers decided to transfer the next tranche of the bailout funds. The Greek government pushes one austerity measure after the other through parliament while protests and strikes don’t come to an end. The fall of Greek GDP growth accelerates with each austerity measure passing legislation procedures. At the same time, gold and other precious metals trade far below their highs made this year. Therefore, some commentators ask the question whether gold still serves as a safe haven and whether the eurozone debt crisis still has an impact on the price of precious metals.

Of course, gold is still a safe haven. Otherwise, it would not have rallied to prices above 1,900$/oz in September. However, even prices of an asset serving as a safe haven could fluctuate. If there is a wave of save haven buying, as it was the case over the summer, demand has to increase permanently to absorb supply, which usually increases with rising prices. Once the rush to a safe haven subsides, also prices retrace. Or put it in other words, once the last seeker of a safe haven has bought, who is left to push prices still higher? If those investors who bought gold were no longer convinced that it is still a safe haven, they would sell gold and prices would be much lower.

Therefore, we can draw a first conclusion. Gold is still a safe haven but the eurozone debt crisis is no longer leading to sufficiently high safe haven buying to lift gold prices to new record highs. However, the question arises, how is this compatible with observations that negative news related to the eurozone debt crisis does not lead to short term price increases but to falling gold and other precious metal prices?

The answer is rather easy. Precious metal prices follow again more closely those fundamental drivers, which are highly significant in our quantitative fair value models. The three major fundamental factors are the stock markets, the price of crude oil and the US dollar, either versus the euro or versus the basket of the major currencies as measured by the US Dollar Index (USDX). And these factors are currently still heavily influenced by the development of the eurozone debt crisis. However, negative news with respect to a solution of the debt crisis has a negative impact on the fundamental factors, which finally also have a negative impact on the prices for precious metals.

We have now an approach to explain the price movements of the precious metals with respect to the debt crisis in the eurozone. However, this approach is not very helpful in predicting even the short-term direction of precious metal prices. The reason for this failure is the lack of reliability and credibility of European politicians. For example, last week at the G20 summit, the finance ministers of the eurozone promised to deliver a solution at the EU summit taking place today at October 23. But already the following Monday morning, the German finance minister paddled back and stated that a final solution to the debt crisis should not be expected at this summit. Thus, gold initially rose in line with stock markets and a firmer euro against the US dollar, but turned negative after the comments from Mr. Schaeuble. It is already hard to understand that investors buy bonds with a negative real return, but it is even harder to understand that they also buy bonds of a country, whose finance minister is no longer trustworthy.

It remains doubtful that the eurozone politicians will find a solution at the EU summits taking place on October 23 and 26. France and Germany are split in the crucial question how the EFSF could be leveraged. Many German commentators already get scary when they hear the word leverage. Furthermore, the German position is driving more by ideology and dogmas. Therefore, Germany favors a model of guarantying a part of the nominal value of government bonds against a default. The position of France is more pragmatic by favoring to provide the EFSF with a banking licence, which would open the EFSF the access to the repo facilities of the ECB, like for every other bank within the eurozone.

Thus, we can only come to the conclusion that gold would probably fall below the 1,600$/oz mark if the eurozone fails to deliver a convincing solution. However, if finally the eurozone delivers a package of measures that convince financial markets and therefore, also reduces the uncertainty within the real economy, then stock markets, the euro and also the precious metals are likely to rally.