Gold Is Still a Safe-Haven As a Greek Default Still Seems Inevitable

By Marko Puustinen


Concerns about Greek default, and the knock-on effects which could have drastic consequences on global financial markets, have diminished - for now. However it is far too early to completely write off a Greek default which seems inevitable in the long term. Some analysts say five years until default, but others say this is far too optimistic and Greece will collapse financially well before that.

However, for the moment with the help of a €12 billion loan from the EBC and IMF, Greece has managed to ward off default. Therefore, coupled with the traditionally weak summer period and less demand from Asia, we are likely to see gold remain under pressure for the next month or so.

Although lending further money to Greece seems to be pouring more money down the drain, a default would drive German and French banks near bankruptcy because of the huge amounts they have invested in the debt. The knock-on effects would then descend on Portugal and Ireland, who also face huge debts and which would in turn put stress on the U.K and Spanish banks.

The prospects for gold remain strong as the gold price continues to hang around $1500. At the moment (1/07/11) gold is trading in the low $1,490s however, this is largely from relief that Europe has not actually imploded financially yet. However, there is more than enough economic distress to keep gold prices from falling further:

• Massive structural problems exist in the U.S. The housing sector continues to be a problem and the fiscal deficit is large.
• Worries over the increasing possibility that Greece will default will resurface over the next few weeks and months.
• Greece defaulting would produce a domino effect, forcing Portugal, Ireland, Spain and Italy into the same position- European lenders still have almost $2.trillion linked to these countries.
• The weak US dollar is gradually losing its status as a global currency, which is a logical consequence from the quantitative loosening; however the US only has until the 2nd August to make a decision whether or not to raise its debt ceiling.

The safe haven aspects of gold investment will return especially from September so now is the perfect opportunity to buy gold while prices are sitting lower. Although technical factors could drive gold down further in the short term, things are likely to get worse for the Global economy, which will see gold continue upwards again; therefore this is perhaps not the time to be selling gold. Until the economies of countries in Europe and the USA begin to pick up (which seems some way off yet) inflation will continue to increase and as such gold prices will continue to climb.

Overall, given the chronic uncertainty the financial world is facing and the trust lost in central banks, we believe that investing in gold is the right answer. The situation for the Euro and the US Dollar only seems to be getting worse and therefore the global expansion of monetary supply should continue to provide gold investments with a positive environment to thrive in.

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