Gold didn’t budge: Why investors thought the Greek crisis contained

Investing in gold sure has advantages, particularly during times of crisis; gold is known as a safe haven investment. In fact, many investors believed that gold is a smart hedge as the demand for bullion rose amid concerns about the Greek turmoil spreading to other countries within and outside the Eurozone.

Images of bank lines in Athens seemed to trigger the demand in the United States for physical gold, though gold futures remain unfazed. According to Terry Hanlon, president of Dillon Gage Metals in Dallas, he had seen volumes grow by 70 percent in just a month. These did not reflect in the price of gold though. Futures speculation tends to dictate it; it doesn’t move in sync with trades of physical gold.

Greek and gold

Those who invested in gold couldn’t be more disappointed. The yellow metal reversed slight gains to trade around 0.3 percent lower at $1,169 at one point, despite heightened uncertainty around the fate of Greece. Gold’s performance puzzled many, but commodities analysts explained what made gold act the way it did.

“The market seems a little more confident with the situation now,” said Victor Thianpiruiyam from ANZ. “There seem to be reassurances from Eurozone officials that the contagion risk from Greece will be relatively small, if any.”

Another possible reason was that gold’s fundamentals remained weak, despite being a hedge fund. “People have an eye on longer term fundamentals, the potential for higher interest rates, rising US dollar, no real signs of inflation on the horizon—and finally the possibility of ongoing softness in jewelry demand in China with economic conditions there softening,” said Ric Spooner, chief market analyst at CMC Markets.

For many, gold is only important during a complete currency crash. This is especially true when all other currencies are feared. And its value remains to be seen during a political crisis. If the crisis gets out of control, gold will typically fall in a deflationary environment.