Gold price: First signs of Greek contagion

Gold on Monday was clawing its way back to the $1,200 an ounce, a level it hasn't strayed too far from for the better part of three months.

In quiet afternoon trade in New York, gold for delivery in August added $7.80 an ounce from Friday's close to exchange hands for $1,186 an ounce, the best level since June 2.

Gold's reaction is fairly muted given the failure of last-ditch talks between Greece and its creditors which is pushing the European nation ever closer to a default and possible exit from the eurozone altogether.

Markets appear to be remarkably complacent about the latest Greek crisis. A new research note by Capital Economics, an independent research firm, suggests given the lack of agreement on this one tranche a comprehensive new bailout deal seems unlikely and despite firebreaks put in place a Greek default may well end in a return to the drachma.

Capital Economics says it's "just starting to see signs of contagion from Greece to other bond and equity markets in the euro-zone". The spreads of Italy’s, Portugal’s and Spain’s 10-year government bonds over 10-year German Bunds hit their highest for the year on Monday after the collapse of weekend talks:

"A Greek default alone may no longer be a huge surprise and the sums involved would be small in the global scheme of things. However, if the uncertainty undermines investor confidence in the rest of the region, the gold price is likely to climb a lot further. What’s more, if Greece does default, the focus may soon move on to the far more serious issue of potential Greek exit from the euro-zone itself."

Contagion from a Greek exit could also be greater than markets expect because "if Greece’s economy eventually thrived outside the euro-zone, as we expect it would, this might fuel the rise of anti-austerity and euro-sceptic movements in other European countries."

This chart using Portuguese government bonds as a proxy for other vulnerable states in the eurozone shows gold and yields have plenty of upside considering the heights seen when Greece was on the brink last.

Gold price: First signs of Greek contagion

Source: Capital Economics

Capital Economics expects the gold price to reach $1,400 per ounce by the end of the year, but a messy exit could mean its above consensus view may be too conservative.