Gold - a crisis metal?

Gold has a widespread reputation to be a metal being bought as a safe haven in a crisis. But it is not always living up to this reputation. In the markets for government bonds, many investors are concerned that some countries may be heading towards bankruptcy, given the development of national budgets as a result of the global crisis . In Europe the situation is precarious, particularly in Greece. But also the budget deficits of Spain, Portugal and Ireland are a concern, and the debt of the public sector in relation to GDP in Italy is not far below that of Greece. Actually, the gold price should rise at such a crisis situation, but it falls. Gold also offers no protection for investors from the euro zone, seeking to protect themselves against a state bankruptcy of a member country.

The reason for the failure of gold as a protection in a crisis is easy to spot. The increase in the gold price in 2009 was not due to a backlog of demand from consumers on the supply of gold mining producers, but resulted from the demand from investors, but also the first time central banks were net buyers on the site. The investor demand for gold is, however, essentially determined by the development of the U.S. dollar, particularly against the euro.

The crisis of the Greek state budget became now also a crisis of the Euro. In particular, Anglo-Saxon analysts play the scenario, Greece will leave the Euro or even might be excluded from the euro and the EU. Also Prof. Doom, Nouriel Rubini, has joint the chorus calling a breakdown of the Euro. ECB President Trichet described the scenario in the recent press conference as absurd, and rightly so we think. But this does not alter the fact that the euro against the U.S. dollar could remain under pressure as long as the yield spread between the 10j. Greek government bonds over German government bonds expands or the cost of hedging against a Greek national bankruptcy (CDS) increases. In the previous week, although some investors might have pulled the ripcord, and have closed positions. The situation calmed after Greece successfully placed 5yr notes. However, the spread over 10yr Bunds and the 5yr CDS widened again on January, 27 after the Greek FinMin denied reports in the FT and WSJ that it mandated a US investment bank to place bonds of 25bn Euro with China. Thus, as long as the market doubts Greece will be able to attract investors for its new bonds and to succeed curbing the budget deficit, the euro could also be prone to weakness. The gold price is likely to head lower during this phase of euro weakness.