In recent weeks there was the very real possibility of a Greek default, but the gold prices did not rise. Did gold fail as a safe-haven asset?

Counterintuitively, gold prices have remained flat, when Greece lived on the edge of default. This surprising behavior has prompted some analysts to claims that the precious metal had lost its safe-haven appeal. This is true that gold usually gained on Greek woes; however we believe that it is too early for such opinions. Why?

Well, there may be many reasons. First, the value of gold is determined by multiple factors, therefore investors’ expectations of the Fed’s hike could simply outweigh the safe haven factor for gold. Second, the yellow metal rivals with the U.S. dollar as a safe-haven and the latter was preferred for investors (again, due to expectations of the interest rate hike). In other words, as gold is a bet against U.S. dollar denominated assets, the precious metal reacts more in case of turmoil in America than in the periphery of Europe. Third, the broad economic situation and sentiment toward gold are different. In case of the Great Recession or the previous acts of the European sovereign-debt crisis the gold was in the bull market (and the U.S. dollar was in the bear market), while now it moves sideways.

The fourth and perhaps the most important reason is that gold generally protects again systemic tail risks. The world “systemic” is crucial here. The gold prices react more when the event may be difficult to contain and there may be significant spillovers to other markets. This is why gold prices reacted strongly during the 2008-2009 financial crisis the first two phases of the European sovereign-debt crisis (in 2010 and 2011). On the other hand, when the turmoil is localized, the gold prices usually do not react as much. Therefore, investors could believe so far (wrongly or properly – this is another matter) that a Greek default and potential Grexit will not be entail contagion effect. The same applies to China’s stock market crash and Puerto Rico’s debt-crisis – investors expect that these risks will remain local.

The key takeaway is that gold prices did not rise after recent global woes (like the recent phase of the Greek debt-crisis), but it does not necessarily mean that the precious metal lost its safe-haven status. Actually, gold was performing better than most commodities, which proves that safe-haven factor was present, but was outweighed by stronger U.S. dollar and expectations of Fed’s hike. So far, investors do not believe that the current risks (like Greece, China or Puerto Rico) may entail significant spillovers, however if the risk of contagion increase, the gold will probably react stronger.

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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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