Greece Fallout Not Yet in Gold Prices

The U.S. Come gold futures were down 0.96% in Q2 compared to -2.92% for the Dollar Index, 0.28% for the S&P 500 Index, and -5.25% for the Euro Stoxx 50 Index. For the month of June, the gold futures and the Dollar Index were down similarly by 1.48% and 1.47% respectively. The S&P 500 Index however dropped 1.94% while the Euro Stoxx Index fell 3.82%. As the Greece saga heat up this week, both the gold prices and the Dollar Index were almost flat while the stock prices globally tanked. Since last Friday, the ten-year German Bund yield fell 16bp to 0.762% on Tuesday while the ten-year Italian bond yield rose 18bp to 2.327%. The ten-year U.S. Treasury bond yield rallied 12bp this week to 2.35%. The VIX, the fear index, surged from a low of 12.11% last Tuesday to currently 18.23%, a jump of 50%.

Deadline Missed, On to the Referendum
On 30 June, Greece, an original founding member of the IMF, became the first developed economy to miss an IMF payment. The existing bailout programme has also expired. However, the key events are the 5 July referendum as well as the 20 July deadline for Greece to pay back the ECB; if the ECB is not repaid, then Greece is officially in default, which will trigger other debt restructuring and chaos. Volatility will be exacerbated by the market illiquidity during summer, which can impact the decision of the Fed to hike rates in September. In China, despite some signs of stabilization, the official manufacturing PMI in June was unchanged at 50.2, lower than the expectation of 50.4.

Gold Demand Rises
Despite no deal on Greece, gold prices have not surged as the cash has gone to the safe haven bonds such as the U.S. Treasuries and the German Bunds as well as currencies such as the Dollar and the Swiss Franc. Also, the Fed may still rely on the stronger data to hike rates in September, dampening the interests in gold. However, the gold investors bought 6.7 metric tons of gold last week as the Greek crisis intensified. The managed money net gold combined positions surged 11.33% during the week ending 23 June, led by some short covering. If Greece actually defaults and starts the process of leaving the EMU, gold prices have room to rise.