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July 1, 2015

Why Greece Turmoil Fails to Lift Gold

Despite the turmoil in Greece, gold is trading relatively flat…
At $1,171 an ounce at writing, gold can’t even make it back above the psychologically important $1,200-an-ounce mark.
And it’s down 1% so far this year.
This is odd…
As Bill says, gold generally rises with uncertainty and desperation – two things in no short supply right now in Europe.
One answer to this puzzle is that Greece doesn’t matter nearly as much as the mainstream press would have you believe.
The Greek economy is about the same size as the economy of Atlanta, Georgia.
And since Greece won independence from the Turks in the 1830s – just under 200 years ago – it’s been in default for roughly 90 of those years.
As financial adviser Josh Brown, at Ritholtz Wealth Management, put it:
To a person with any historical awareness, being told that Greece is on the verge of a default is like hearing Dean Martin is on the verge of a martini.
Another reason why a Greek default is less of a problem than most people think is that of the roughly $313 billion of outstanding Greek debt, only about $45 billion – or 14% – is owed to banks.

The bulk of the debt is owed to the International Monetary Fund, the European Central Bank, and Europe’s rescue fund, the European Financial Stability Facility. And these public institutions can better absorb any losses.
But there’s something else at work, too…
The Greek crisis has kept the euro weak against the dollar. And that’s a major problem for commodities.
Let me explain…
If the euro is strong, it weakens the exchange rate of the dollar. This pushes up commodity prices.
That’s why economists say there is an “inverse relationship” between the strength of the dollar and commodity prices. Commodities are priced in dollars. So, it’s automatic.
This is best illustrated in the chart below. It plots the performance of the Thomson Reuters/CoreCommodity CRB Index and the euro-dollar exchange rate.

As you can see, commodities prices have closely tracked the euro’s strength versus the dollar going back to the start of the single currency.
A strong euro tends to mean a weak dollar. A weak dollar tends to mean higher commodity prices.
The reverse is also true…
As the euro weakens against the dollar, commodities – including gold – tend to suffer.
As long as the Greek crisis keeps the euro weak… don’t expect fireworks from gold.

Courtesy Chris Hunter for Bonner & Partners
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