Wednesday, June 29, 2011
Trading Gold and Its Eurozone Crisis Premium
Recently gold challenged it’s all time highs, being propelled largely by renewed concerns over the Greek debt crisis and the possible ramifications a default could have on global financial markets. Whilst fears of a possible default in Greece are supportive of gold prices in the short term, it is important to understand that such pressures are largely temporary in nature and they do not significantly change the underlying market dynamics in the longer term. We feel the best way to describe this is by way of visualising that there is a premium built into the gold price that varies with regard to how prevalent fears over the Eurozone crisis are. Just to clarify, we are considering the effect that fluctuations in fears over the Greek situation have on the gold price, not the effect that an actual default would have on the price. When fears escalate, the gold price increases and when fears subside, then so does the gold price. It does not necessarily significantly alter the overall direction of gold prices over the longer term.
We think it is important to understand how changes in this “Eurozone debt crisis premium” impact the gold price. Distinguishing between price swings caused by fears over Greece and price swings that occur when a true fundamental or structural change has taken place in the market is imperative for valid and reliable market analysis.