As negotiations in the Greece-EU saga improved on Monday June 22nd, gold prices continued their long tumble down the rabbit hole.
The precious metal dropped by nearly 1.5% during the morning hours of trading, ending a short run during the previous week. Gold prices have dropped 38% since the all-time high in September of 2011. (Source: Bloomberg, June 10, 2015.)
Meanwhile, European stocks have advanced two percent since Greece released its plan to restore funding from European creditors.
Gold Hits the Floor
Some analysts have noted that subdued gold prices may lead to a contraction in the supply of gold. Many mines are unable to continue operating in the low revenue environment, resulting in the closure of existing mines and a pullback in new exploration. (Source: Reuters, March 6, 2014.)
The commodity lost more than a third of its value since 2011. As a safe haven asset, its value rises when there is uncertainty in the market.
On June 18th and 19th, when Greece’s departure from the euro appeared imminent, the price spiked to $1,200. The sudden jump was corrected on Monday simply because a deal in the matter had become probable. (Source: The Wall Street Journal, June 22, 2015.)
Mirroring the commodity’s rise last week were several gold producers, including; Agnico-Eagle Mines Ltd., Barrick Gold Inc., and Seabridge Gold Inc. All three firms edged up more than one percent before losing those gains on Monday.
Soaring Equity Markets
Over the last several years, stock prices have surged. The Dow Jones Industrial Average gained 43.5% in the last three years, the NASDAQ jumped an impressive 75%, and the S&P 500 advanced 60%. (Source: The Wall Street Journal, June 22, 2015.)
Those markets have retained their buoyancy by believing that the political situation in Europe will be contained. But many analysts worry that a decline in political stability will shake investor confidence, leading to a market sell-off.
History has shown that capital flight usually lands investors in known safe havens like gold, U.S. Treasury bills, or Swiss francs. They are the traditional hedges against a downturn. However, if the volatile political situation in Greece subsides, investors will once again look to stocks for growth.