For the next little while, I am watching three events—I’ll call them developments—very closely. These developments could impact gold prices and cause sharp movements to the upside in a very short time. What are these developments? Talks of Greece’s potential exit from the eurozone, rising interest rates, and an economic slowdown in the global economy.
Greece to Exit from Eurozone?
Not too long ago, Greece elected into power a radical left-wing party. It is making strides and calling for all the money that has been given to Greece in the form of bailouts to be renegotiated or just simply written off. In other words, there may be another Greek default in play.
In addition to this, there is a significant amount of noise regarding Greece exiting from the eurozone. There seems to be a wave of preparation going on regarding this and the question of what happens if Greece does exit from the eurozone. For example, the prime minster of England held a meeting with senior officials to talk about a possible Greek exit and make sure that the companies and banks in the country wouldn’t be severely hit if this event does take place.(1)
We also heard about Germany preparing or evaluating what will happen if Greece’s exit becomes a likely scenario.
And if Greece does exit the eurozone, what stops other debt-infested countries like Spain and Portugal from leaving? All of this will only cause more damage to the euro. Investors who are affected by it can move towards gold to counter the devaluation in the currency.
Federal Reserve Raising Rates
The Federal Reserve increasing its benchmark interest rates remains a major concern. Remember, it is one of the only major central banks in the global economy that’s pushing for a tighter monetary policy; others are busy lowering their rates and printing money. This divergence in monetary policies could wreak havoc across the board.
Understand this: over the past six years, with the Fed keeping interest rates low, businesses and individuals have raked in massive debt loads. Higher interest rates will result in higher costs on debt. Concerned about this phenomenon, Bank of England Governor Mark Carney said, “This will test the resilience of that new financial system. It has a potential feedback and we have to be aware of that.”(2) In other words, this even has the potential to put stress on the financial system.
And a financial system in question could cause investors to run towards gold as well. (I am also researching the derivatives market and the extent of its impact on the gold market, which I will be reporting on soon.)
Slowdown in the Global Economy
No matter how you look at it, the global economy seems to be slowing down. We already know the eurozone is in trouble. There isn’t anything cheerful about Japan either; sadly, there’s nothing new there. These two economies remain fragile.
Add to that the fact that we’re now starting to hear a significant amount of negative news coming out of China. For instance, in the first five weeks of 2015, the price of steel in China declined 12%. This is almost the same amount of decline in steel prices witnessed in the entire year of 2014. But that’s not all; the demand for commodities like rubber, oil, and other industrial materials has also fallen significantly.(3) China is considered the manufacturing hub of the global economy; demand for basic materials declining suggests a massive slowdown.
And if the major economies slow down, the small ones will follow their lead. All of this can send a wave of uncertainty across investors—and gold does great in those times.
Why Isn’t Gold Rising Then?
Currently, concerns about deflation are driving the gold market. Investors are too worried that the prices will decline and gold will not perform. But I believe the deflation is just a small concern. We may see some deflation, but it will be very short-term.
Long-term, inflation remains a worry. Considering inflation combined with the developments mentioned above, gold at its current prices looks like a good deal. Certainly time will tell more, but I’d continue to pay attention to precious metal mining companies.