This chart shows Grexit would send gold price to $2,000
The wargaming suggested Greece may have only 46 hours – Friday’s close in the New York to Monday’s market open in New Zealand – to pull off any sort of non-chaotic departure:
“Over the two days, leaders would have to calm civil unrest while managing a potential sovereign default, planning a new currency, recapitalizing the banks, stemming the outflow of capital and seeking a way to pay bills once the bailout lifeline is cut.
“The risk is that the task would overwhelm any new government in a country that has had to be rescued twice since 2010 because it couldn’t manage its public finances.
What makes a Grexit music to the ears of gold bugs is what central banks will have to do next according to this euro-exit scenario:
“To stem any dollar shortages as a result of market panic, [apart from the ECB] other central banks including the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank probably would stand ready with swap lines augmented after the bankruptcy of Lehman Brothers Holdings Inc. in 2008.”
While that scenario sounds fairly dramatic, fast forward three short years and markets appear to be remarkably complacent about the latest Greek crisis.
There has been progress in ring-fencing Greek debt (which is now largely held by government-level institutions rather than private banks for one) and gold seems to be pricing in a positive outcome to negotiations between the EU and Greece to determine bailout conditions.
Nevertheless it’s far from certain that a Greek exit from the single currency can be avoided. And worse that contagion wouldn’t spread to the bloc’s other peripheral economies like Portugal and Spain.
If the euro looks under serious threat it could create safe haven demand as happened after Switzerland dropped its currency bombshell in January.
Independent research house Capital Economics Head of Commodities Research Julian Jessop expects gold to benefit from a revival of safe-haven demand due to the crisis in Greece and sees gold ending 2015 at $1,400 per ounce adding that in a messy euro break-up scenario, safe-haven demand could easily drive it to $2,000:
“Admittedly, the price of gold was undermined during the recent banking crisis in Cyprus by talk that the central bank would be forced to sell its holdings to help finance a bail-out. But this talk came to nothing. Indeed, we suspect that Greece would rather keep her gold than the euro.
“After all, recent calls to repatriate German and Swiss gold held overseas (mainly in the US) have illustrated the general public’s attachment to the precious metal. What’s more, in the unlikely event that the Greek authorities were forced to sell gold – either to forestall euro exit, or to raise foreign currency in the subsequent chaos – they would surely find plenty of willing buyers at higher prices.”
Image of Zeus statue in National Archeological Museum of Athens by Jean-