Would Purchasing Gold Be Viable Based on Grexit?

One of the most discussed about debate off late has been regarding about how viable it would be to purchase gold as an investment instrument, when the Grexit concerns are making news. This post would help you to understand the scenario better and you would be able to take a well-informed decision based on it.

Is gold a stable investment?

When there is a crisis or instability in the financial markets, the best measure of inflation would be the price of gold. Due to this, the value of gold increases when there is an inflation and instability in any region.

Off late, the Russian Rubble came under sever threat due to the sanctions it had imposed on Ukraine and the reduction in oil prices fastened the fall further. The standard price of gold is measured in USD worldwide and the association for gold is the SPDR Gold Trust, which handles the commodity GLD in NYSEARCA. However, the price of gold can be interpreted in other ETF or other parameters.

Now that the pricing and valuation of gold is clear, we can focus on the most debated question: should gold be purchased when the political and economic situation is in jeopardy due to Grexit? When you consider one perspective, buying gold is an excellent idea due to the instability present in the financial markets. However, when you think further, you would also realize that the gold prices are set to surge due to the existing instability, resulting in a drop in the prices of gold. So, either way, there is no profitability for sure.

What drives the USD value?

Going by the market trends, the value of USD increases due to its fundamental strength. The FOMC also released a statement, which shows a clear hint that the US economy is set to improve and this would only act as a catalyst in driving the USD values higher.

Previously, the statement that was released a few months ago was not in favor of the USD and areas such as labor, housing and retail were under threat. To further elaborate, the expectations on gold prices would not be evident until there is a statement from FOMC. If the statement also reflects a default from the Greek markets, this would result in the transfer of money from the European markets to further strengthen the USD.

What are the factors that strengthen the value of gold?

As per the prevailing trends, gold is not a highly stable commodity. This is mainly due to the regulations that were passed after the Great Recession, with a bid to mitigate the risks involved in the banking industry. Also, the banks in Europe are no more allowed to choose the least tax regulator and they would necessarily have to come under the European Central Bank, or ECB. The ECB in turn has made it mandatory for banks to raise capital which can also serve as a buffer if there are bad debts which might paralyze the operation of banks or when they have to function under severe stress.

In one of the major stress conditions, the authorities were having a time period of 3 years to take into task the shortcomings due to the Greek debt crisis, which was first observed in 2012. To be more precise, the Governing Board Member of ECB and the Governor of the French Central Bank were of the impression that the exit of Greek would have literally no repercussions on the French banks. Although this probably could have been a negotiation trick, the authorities did little to safeguard their markets against the exit of Greek.

But one thing is for sure that till Euro remains the currency in trade, there are bleak chances of the USD appreciating. However, this analysis is made with the consideration that the European Union would be able to handle the Greek default. The Greek default would not emerge as a major issue until it is contained by Europe and it certainly would not transform into a global crisis. However, the first victim would be the Euro currency and it would end up eliminating all the gains which happen due to a better economy.

Hence, if you have Euros, it is best recommended that you get them converted to USD. Or the other way, for non-USD holders, gold would be your best investment, whereas gold holders can trade their gold for USD.

One more parameter that has an adverse effect on gold is the inflation. Major banks from all over the world had taken several measures to ensure that they tackle inflation and hence, they are stringent regarding their finances. However, central banks are confident that within a short span, they would bring the inflation levels down to 2%. The short span would range from anything between 2 to 5 years, during which there would be no benefit in possessing gold.

What do the charts and statistics have to say?

When you consider the trends of gold in the XAU/USD perspective, the chart can be viewed and interpreted. You would realize that the maximum impact of Grexit was felt from a period of December 2014 to January 2015, which is exactly when there were rumors that Syriza would be heading the Government. Due to this, there were fears in the market regarding the Greek government. But rest assured, they would default and moreover, Greeks would be protected by the European Union during times of crises.

As seen in the chart, it is evident that between February and April, the prices were related to USD rather than the proceedings of Grexit. As of now, the indications are strong that gold would not perform well and might see a fall.

So, the best bet would be that gold would continue to fall immaterial of the proceedings of Greece. Even if they default or if their negotiation fails to progress, it is highly unlikely that the prices of gold recover.

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Category: Professional