Gold and the Greek aftermath; and Ukraine too having an impact

The Greek election result fallout has created significant waves in the gold market looking ahead – while there’s always the Ukraine to spice things up….  Update of article previously published 2 days ago on 

Lawrence Williams

Perhaps predictably, gold initially jumped up to the $1300 level in Asian trading as the Greek election results became apparent.  But as the news, which had been largely anticipated, began to be assessed the gold price fell back fairly sharply in London trading before subsequently recovering up to around the $1290 level whereabouts it has remained since give or take a few dollars.  Analysts at Commerzbank put this down to ‘buy the rumour and sell the fact’ profit taking, but with the aftermath of the election result still to really impact, one suspects that the likely forthcoming very difficult negotiations between the new Syriza government in Greece and the EU/ECB and the IMF over renegotiation of Greek debt will create some significant waves in the gold market ahead.  Syriza has promised to end most of the austerity measures imposed on it by its bailout lenders and there doesn’t seem to be any means of paying for this without defaulting on its billions of dollars of bailout loans unless the EU/IMF can be persuaded to cut and/or extend them.

Initial indications are that the IMF, and probably the Eurozone nations led by Germany will, however, strongly resist any Greek attempts to renegotiate and write-off much of its debt.  IMF Managing Director, Christine Lagarde for example seems to be taking a hardline approach.  “A debt is a debt” she is reported as saying.  But how much this is setting out an initial negotiating position ahead of the inevitable horse trading remains to be seen.  If all this results in deadlock then there is a strong likelihood that Greece will default on its debt as soon as next month, or at best by this summer with the possibility it will be ejected from the Eurozone by the other members who may have had enough of the already huge costs of trying, unsuccessfully, to support the Greek economy and bring it back on track.  The Greek Syriza point of view is that with the huge debt overhang it will be impossible for the Greek economy to recover for years, if not decades if it continues to have to repay them.

But Syriza itself may not even have an easy internal ride.  It appears to be agonisingly short, by 1 seat, of an overall majority in the Greek parliament and has had to enlist an unlikely coalition partner in Independent Greeks – a right wing party which has little in common with the radical left wing Syriza apart from the ending of the austerity measures which have so devastated the Middle and Lower classes’ incomes and generated huge unemployment – particularly among the under-24s (estimated at around 66%).

Syriza itself is also something of an unholy alliance of Marxist far left across to some with almost Centrist viewpoints, but again all opposed to the austerity measure imposed on  the nation as a condition for past bailouts and put in place by the now defeated New Democracy party which controlled the previous administration.  There is a substantial element which wants an immediate Greek exit from the Eurozone – something Syriza’s leadership has tried to play down ahead of the election, as this option is not seen as a popular one amongst the general population.  However, if Greece is forced out of the Eurozone, and this can be blamed on current bêtes noires Angela Merkel and Christine Lagarde, somewhat akin to Russia’s President Putin being able to blame his nation’s economic woes on the U.S. and its allies and carry the nation with him, then that might make an eventual Greek exit (Grexit) more palatable internally.

There is also the potential of the Syriza victory generating momentum for other European anti-austerity and anti-Eurozone groupings.  The attempted negotiations on loan mitigation between the new Greek government and the EU/ECB/IMF , coupled with ever more uncertainty as to whether the EU itself will survive amidst the economic difficulties which beset it is bound to create uncertainty in the weeks, months and possibly years which lie ahead – and geopolitical uncertainty is a strong driver of investment money into perceived safe havens like gold.  So don’t write off gold’s initial relatively samll downwards move as the end of the recent momentum upturn as it looks like volatility, both down and up,  could be back in play in the markets.

As Julian Phillips succinctly puts it in one of his recent daily newsletters to his and subscribers:

“The result Eurozone officials feared most in Greece happened over the weekend with the far left party coming into power with all but one of a clear majority in Parliament. It is clear to observers that unless the E.U. agrees to write down debt and allow a turnover of austerity measures, the new government will have to leave the euro. It’s one or the other. Certainly, Greece is a drag on the euro as is Spain, but without them the euro would be much stronger, something Germany and other member states don’t want, so they must weigh this against agreeing to Tsipras’ terms and keeping Greece in the euro. What is a certainty is a painful path from now on for the euro and E.U. itself ensuring ongoing uncertainty in Europe.  Today the euro tried to fall below $1.12 but suddenly the euro is rising. The next few days will see the news on Greece being digested. But we mustn’t forget that the E.C.B. is soon to start its QE program. Will the E.C.B. buy Greek bonds against this background? February will see a decision on this come as Greece must renew debt obligations or default then. We do expect to see a weaker euro, at least up until then.

The ripples out from where this particular stone hit the water, covering Europe and the rest of the world have yet to be seen. Whether Greece stays in the euro or leaves it, we believe the resulting scene will be positive for the gold price.”

But Greece and its travails are not the only geopolitical goings-on which could have a positive impact on safe haven demand for gold.  ISIL and other fundamentalist Muslim militarist factions are most certainly not going to go away without considerably more grief to come.  They have the prospect of generating ever more military and political mayhem, not only in the Middle East, but also in North and West Africa and Asia where there are very substantial Muslim populations.

Meanwhile media overload has largely relegated what’s going on in Ukraine to a place among the less important stories out there.  Arguably the latest action in south east Ukraine, with the Russian-supporting separatists apparently moving to try and take control of the strategic port of Mariopol on the Sea of Azov, could be an equally destabilising force in European geopolitics.  Russia denies involvement, but the apparent usage of high tech weaponry by the separatist rebels belies a totally neutral standpoint.  A Russia-friendly controlled land corridor along the coast to Crimea would be of considerable strategic importance.

Should, heaven forbid, NATO be dragged into any kind of military action in support of Ukraine forces then this could result in a very significant conflagration and one doubts NATO’s European members would want to see this.  It would be a very different proposition to the military action taken against Iraq or Serbia.  Russia has high-tech weaponry, and a well-trained army, which would be a match for what most of the West can assemble and would have a significant logistical advantage in fighting next to its own borders.  The USA being further away geographically may take a more belligerent tone, but even the extreme ‘nuke-em’ brigade would probably fall silent given the possibility of being ‘nuked’ back.

And as for increasing economic sanctions against Russia, an economically weak Europe would probably not be keen to go down this route either given Russia’s potential for retaliating in kind – particularly in terms of cutting off oil and gas supplies.  The West may well be miscalculating Russia’s ability to survive economic hardships also.  The Russian population’s been through all that before, and can no doubt do so again without generating, in any serious manner, anti-government protest.  President Putin has a very high popularity rating as being a strong leader who has put Russia back on the map as a major military and political powerhouse which has done wonders for Russian pride.

So lots of potential ahead for geopolitical elements that may work in favour of a retreat into gold as a safe haven investment – and these are just the ones we know about.  We’ve already had a few unpredictable Black Swan events in the first three weeks of the year (see: 2015 Black Swans abounding – Safe Haven gold to benefit).  On this pattern there could be a whole host more ahead in what is already turning out to be something of landmark year for geopolitical discord and change.

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