With Greeks going to the polls to elect a new government in just over two weeks, concerns over a potential Greek exit or ‘Grexit’ from the euro is growing and this has led to the euro falling against the dollar and particularly gold.
Speculation as to the consequences of a Syriza victory has caused the euro to fall to it’s lowest level against the dollar since 2010. Gold has surged to close to EUR 1,020 per ounce this morning – building upon the 11% gains seen in 2014.
Gold in Euros – 10 Years (Thomson Reuters)
Over the weekend Germany’s Der Spiegel reported Angela Merkel’s view that Germany would be “comfortable” with a Greek exit and that “any fallout would be manageable.”
That the Chancellor felt the need to make such comments is been seen by some as an attempt to scare the Greek people away from voting for anti-austerity group Syriza.
Syriza’s leader, Alexis Tsipras has already indicated that it is not his intention to pull Greece out of the Euro-zone but to renegotiate certain aspects of the bailout agreements with the Troika, particularly those seen as an unjust debt burden placed on average Greek citizens.
However, it may be that Germany fears the precedent of reopening negotiations between the Troika and Greece lest other countries upon whom onerous conditions were placed – such as Ireland – follow their example.
The assertion that the EU could “comfortably” manage the exit of Greece is a silly one – particularly at this very delicate and uncertain time.
European sanctions on Russia appear to be taking a significant toll on the already fragile European economy. Italy’s former Prime Minister, and former head of the European Commission, Romano Prodi, highlights the problem thus:
“The lowering of the oil and gas prices in combination with the sanctions, pushed by the Ukrainian crisis, will drop the Russian GDP by five percent per annum, and thus it will cause cutting of the Italian exports by about 50%.”
Similar dynamics are playing out in Poland and France.
Continued antagonisation of Russia may have dire consequences for Europe, if Russia chooses to respond more aggressively. France’s Societe General, alone, is exposed to Russia to the tune of €26 billion.
Were Russia to renege on this and other obligations to European banks it would likely trigger a Lehman’s style crisis.
Or Russia could cut its supplies of natural gas to Europe upon which German industry, in particular, relies. Thankfully, for now, Russia has reacted with cool heads, even inviting Europe to become a partner in the newly formed Eurasian Economic Union.
Germany is now dangerously close to deflation as the major states reported from 0% to 0.3% inflation in December, with Saxony at 0.5%, – down from November rates of between 0.5% and 0.8%.
With these and countless other considerations weighing upon the EU, it is not accurate to suggest that a Greek exit and return to the drachma could be comfortably managed.
For one, there is no framework in place for an orderly secession of a member state from the Union. An antagonistic break up would likely cause contagion to many large banks exposed to Greece.
The ensuing turmoil might also prompt other member states to break away in chaotic fashion – Spain, Portugal and Italy being prime contenders.
Many periphery nations are slowly becoming jaded by the not so single currency – which for almost half it’s existence has been in crisis.
It is likely that the EU will do everything in it’s power to accommodate Syriza should they gain power in Greece. Whether it will be enough to keep Greece on board and the drachma off the printing presses remains to be seen.
Gold will protect from currency devaluations – whether that be in the form of the euro itself being devalued or in the form of reversions to drachmas, escudos, pesetas and punts and subsequent devaluations.
Review of 2014 – Gold Second Best Currency, +13% in EUR, +6% GBP
MARKET UPDATE
Today’s AM fix was USD 1,211.00, EUR 1,017.31 and GBP 797.08 per ounce.
Yesterday’s AM fix was USD 1,192.00, EUR 998.91 and GBP 779.90 per ounce.
Spot gold rose $18.00 or 1.52% to $1,205.50 per ounce yesterday and silver soared $0.41 or 2.6% to $16.20 per ounce.
Gold in Euros – 5 Years (Thomson Reuters)
In Singapore, gold continued to eke out gains prior to a small drop off in prices in London trading from $1,214 per ounce to $1,209 per ounce.
Gold’s safe haven status is being appreciated anew due to the concern that Greece may exit the monetary union. This made the euro plummet against the dollar to it’s lowest point since 2006 and euro gold surged to touch €1,020 per ounce.
A close above €1,000 per ounce today will be important technically and could see gold challenge the next level of resistance at €1,072 and then €1,140 per ounce. Gold in euros rose 11% in 2014 – possibly in anticipation of the coming problems in the Eurozone – and appears to consolidating on those gains.
Gold is up over 7.2% since reaching a four-year low in early November 2014.
Traders and hedge funds are becoming jittery over the uncertain snap elections to occur in Greece in 3 weeks which could lead to their exit from the EU. U.S. Commodities and Futures Trading (CFTC) figures show short wagers slid 8.2% and net-long positions rose 5.7% to 98,391 futures and options in the week ended Dec. 30th, after dropping 11% in the previous two week
Bullish bets on gold bullion have doubled since November and have risen for the first time in three weeks.
Shanghai Gold Exchange (SGE) premiums were $5-$6 an ounce over the global benchmark. Chinese buying has increased ahead of their Lunar New Year holiday, where gold is purchased for gifts, and demand will most likely remain strong until the holiday in February.
The Perth Mint‘s sales of gold coins and minted bars fell to a four-month low in the traditionally slow month of December.
CME Group announced today that it will launch its kilobar contract in Hong Kong on January 26.
This new contract will be listed on COMEX and will have contract listings similar to the familiar structure of the benchmark 100 troy ounce Gold Futures contract listed on COMEX. It will be tied directly to 9999 gold prices in Hong Kong and can be physically delivered in Hong Kong.
“The introduction of our Gold Kilo Futures contract will provide price discovery in this key Asia bullion trading hub to market participants around the world, virtually 24 hours a day,” the CME said in a statement.
Chinese demand remains robust but has fallen from higher levels seen in recent days and is down from $7 yesterday to $4 or$5 today.
Silver was up another 1% at $16.40 an ounce. Platinum was up 0.9% at $1,215.50 an ounce, and spot palladium was up 1.1% at $798.45 an ounce.
