Why Greece’s Problems Matter for Gold

It’s déjà vu, all over again.

— New York Yankees baseball legend Lawrence ‘Yogi’ Berra

With sentiment confused, gold is caught in a rut.

One week, it’s up. The next week, it’s down.

After dipping towards US$1,300 per ounce, gold has bounced back this month. It found support thanks to disappointing data out of the US.

Will the yellow metal keep surging?

I’ll let you know next week!

But today, let’s focus on Greece. Why? Because the country is one — of many — factors affecting the gold price.

I’ll explain…

Will history repeat?

Last year, Greece’s economy was on the verge of bankruptcy. The ATM machines ran out of cash in July.

The gold price — a hedge against uncertainty — was volatile.

Would Greece default or not?

In the end, politicians ‘saved’ the day with a bailout deal worth up to €86 billion. Of course, it didn’t change much for the country. Today, we’re back to where we left off…dealing with a county that can’t afford to pay the bills.

Regardless of what happens, it probably won’t end well. Debt is a major source of instability for the global economy. At this point, Greece needs a miracle to avoid default. According to Independent Online yesterday:

On Friday, euro zone finance ministers called on Greece to stay on track with reforms it must pursue under the bailout, which is worth up to 86 billion euros, ahead of a second review of progress in meeting terms that is due to start in October.

It still needs to pursue energy market reforms, create a new body to oversee privatisations and establish a new independent revenue agency.

The Greek premier said the country had already completed 70 percent of reforms required under the bailout programme.

Indeed, the bailout has stalled…

Further funds should be disbursed. After approving a tranche of €10.3 billion in May, only €7.5 billion has been released. The remaining payment could be withheld for the rest of the year.

That would be a huge blow to Athens. There are riots on the street nearly every day, and youth unemployment remains above 50%. Austerity (rapidly rising taxes and a reduction in benefits) has sent the country into a seven-year depression.

If Greece wants more cash from European bailout money, it must implement the remaining reforms before October. That probably won’t happen. Remember, we’re dealing with politicians who love to ‘talk’ and almost never ‘walk’.

Prime Minister Alexis Tsipras charged into power two years ago. He promised an €11.5 billion economic stimulus package. The stimulus bundle included tax breaks, along with increases in pensions, the minimum wage and the tax-free threshold.

But Tsipras delivered nothing he promised. And so another debt standoff seems inevitable.

The debt load, standing at 176% of GDP, is simply unsustainable.

For that reason, with Greece’s default risk rising, keep your eye on the gold price in the months ahead.

The twist for gold

In the long term, the pending global sovereign debt crisis — perhaps led by Greece — should benefit the gold price. In which case, the yellow metal could quadruple from today’s price. And because of the leverage ‘built in’ to gold stocks from a rising gold price, a strategy of buying the best gold stocks for your long term portfolio could prove very profitable.

However, despite the long term story for gold, the short term story looks a bit different…

With ongoing uncertainty, gold may not be as strong as it appears. Remember, when Greece was on the brink of default last year, gold crashed on 5 July. The yellow metal sank further into the week of 20 July — the referendum date. You can see this on the chart below:

Source: TradingView.com
Click to enlarge

Will history repeat?

While my gut feeling tells me yes, I can’t know for certain.

If the yellow metal falls in the months ahead, gold producers and developers could get hit hard. Remember, the best players are highly leveraged to the gold price. With the macro risk I’ve outlined, I recommend steering clear of these companies for now.

Speculative gold stocks, on the other hand, still stand to make huge profits in the right circumstances. In fact, the absolute best speculative stocks should outperform the sector, no matter what happens to the gold price.

When it comes to speculative stocks, the macro story means much less than it does for the big players. Their individual overarching business stories matter the most. If they hit the right resource-rich targets, regardless of what happens around the world, speculative stocks can skyrocket.

For example, mining minnow West African Resources [ASX: WAF] brought investors nearly 10fold returns in under six months this year. Yet, when gold started to break out in late January, the stock price was going down. It made a fresh low in February. You can see this on the chart below:

Source: Combes
Click to enlarge

West African Resources went nowhere until it found extremely high-grade gold in late March. At the time, the gold price was trading around US$1,300 per ounce.

So you can see how speculative stocks don’t overreact to macro conditions. The biggest impact on their share price is their business achievements…or failures.


Jason Stevenson,
Resources Analyst

PS: Over the past couple of weeks, I’ve spent time digging through my watchlist of top Aussie gold stocks. I’ve handpicked a few stocks which could deliver enormous gains in the months ahead. I recommended one of these stocks to Resource Speculator readers last month. And, so far, it’s up close to 100% from the date of my recommendation. You can find out more here.

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