Market Malleable Metal: What Shapes the Price of Gold?
Gold prices buoyant on Grexit concerns
Gold prices rose to their highest level in three months recently. The SPDR Gold Trust (GLD) gained 8.4% in four trading sessions to end at $117.53 on May 18. Gold prices remain buoyant amid fresh concerns of a Greek exit, or “Grexit,” from the Eurozone. Other factors supported gold prices as well, including a delay in the federal funds rate hike.
Earlier in February, a deal was secured to extend Greece’s bailout by four months on the condition that Greece would implement economic reforms. Concerns regarding Greece’s exit from the Eurozone also supported gold prices in January 2015 .
Greece is nearing the expiration date of its current bailout period, which is at the end of June 2015. Its next repayment of 300 million euros to the International Monetary Fund comes due on June 5. Greek government officials have already warned that they might have to default on the payment if they’re not able to finalize a deal with creditors to unlock bailout funds. A default will not automatically lead to Greece exiting the Eurozone, but the chances of its exit will increase.
Gold is considered a safe-haven asset during periods of political or economic instability. Any concerns regarding Greece exiting the Eurozone could spark fresh fears of such instability. As a result, investors could decide to park their money in gold.
Instability and gold
If Greece does something to increase the risk of its being ousted from the Eurozone, it will be positive for gold prices (GLD) and gold stocks, including Goldcorp (GG), Agnico Eagle Mines (AEM), and Yamana Gold (AUY). The Market Vectors Gold Miners ETF (GDX) invests in these stocks. GG, AEM, and AUY form 16.2% of GDX’s holdings.
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