How will a Greek Exit Affect Gold and Silver?

The bets are running high on the speculation around the possibility of Greece exiting the European Union AKA Grexit. How plausible is this scenario? And how such an event might affect the prices of gold and silver? Let’s examine these two issues:

In recent weeks there have been a lot of headlines revolving the Greek debt crisis. The recent elections that weren’t successful to form a new government only further added to the distrust by many that Greece won’t be able to sustain the austerity plan its previous government had agreed to. The upcoming reelections in Greece to be held on June 17 might be the tipping point if the elected parties won’t be able to agree on keeping the austerity plan and won’t be regain the trust of the EU community.

Yesterday’s EU Summit didn’t bring any encouraging news as German Chancellor Merkel still opposes a jointly issued EU bond.

ECB also showed distrust in the Greek banking system as the European Central Bank had stopped providing liquidity to several Greek Banks because they didn’t recapitalized.

There are many, such as IMF Chief, who warn fear this exit will have extremity expensive ramifications on the Euro Zone. One of the reasons many fear this Grexit is because they don’t know the ramifications and level of uncertainly of such an event is high.

But if the Greeks won’t be on board of the EU plan, it will not receive additional bailout funds which will bring the nation to bankruptcy. Such events had occurred in the past (e.g. Argentina) and even though the circumstances were different (they are always different) things weren’t as bad as many had anticipated.

Currently the once tabooed issue of Greece leaving the EU is on the table.

Let’s see how the market is reacting to the possibility of Greece exiting the EU:

The Euro has tumbled down to its lowest level in nearly two years; there is an excellent analysis on the how to trade the Euro with respect to a potential Grexit.

The fall in Euro is another indication of the speculation around the option of Greece exiting the Euro and thus will be the first country to leave it.

As indicated in the chart below during May the fall in the Euro coincided with the downward trend of gold price.

Chart Gold Price and euro usd  2012 May 24The Euro/USD is also strongly and positively correlated with the daily percent changes of both precious metals prices as indicated in the chart below.  This means that it the Grexit will take place which will bring further down the Euro/USD in the short run, and the current relation between bullion and Euro/USD will hold up, then bullion prices are likely to further decline in the near future.

Correlation Gold Price and USD EURO AUD CAD 2011 2012 MAY 24Furthermore, as long as the uncertainty levels are running high, people are likely to seek out safe haven investments such as U.S Long Term treasury bonds.

The recent uncertainty in the financial markets could explain the ongoing fall in the U.S 10 year treasury yields in recent weeks.

Chart Gold Price and 10 Yr Daily Treasury Yield 2012 May 24Since gold and silver have become less of safe haven investments than they once were, I speculate the high uncertainty in the markets with respect to the European Union and Greece is likely to further adversely affecting both precious metals.

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