Guest Commentary: How the European Debt Crisis Affects Gold Price?

The rising concerns in regards to the faith of the European Union continues to grow; the recent agreement struck in the EU Summit in Brussels has failed to ease the speculation around the instability of the European Union. There are mixed signals in regards to the effect of the European Debt Crisis on gold price: Some speculate that the EU crisis pushes gold down and other think the opposite, so which is it?

Many explain the connection between the EU crisis and changes in gold via risk level in the markets: as the risk aversion in the markets rises, traders lean towards safe haven investments including gold and silver. But in recent months there have been a paradigm shift and I suspect that precious metals follow the direction of the Euro.

The chart shows that gold rose during most of 2011 until August when it started to fluctuate and sharply declined. Most of these falls, mainly in August and September were affected by the CME raising the margins on gold and silver.

But during those months the Euro also plummeted as the EU debt crisis took its toll on the markets and sharply raised the risk aversion of traders (this turn of events was probably among the reasons the CME raised margins in order to cool the sharp gains in gold and silver).

Since then, there seems to have been a paradigm shift and as gold and silver became more risky to hold (because of the higher margins), they have also became more affected by the EU crisis via the Euro, i.e. as the Euro got weaker against the USD, gold declined.

The above table shows that the sharpest monthly fall of gold price in 2011 was in September when the sharpest falls of the Euro and AUD were also recorded. In October, as the Euro rose so did gold and silver. Before September, there were months in which gold rose but the Euro fell (January, July) and vise versa.

These charts suggest that the effect of the sharp decline in the Euro/USD, which was stem from the EU debt concerns, also adversely affect gold and silver.

There were also reports that due to the liquidity problem that many European banks faced, they have sold their gold and reduced their position in commodities. If this is true, then it could also explain why gold declines as the debt crisis deepens.

This means that as the European crisis will continue to linger, it could continue to adversely affect the Euro/USD and in turn also trade down gold and silver.

For further reading:

Gold & Silver Prices – Daily Outlook December 15

Gold and Silver Prices Weekly Outlook for December 12-16

By: Lior Cohen, Energy Analyst for Trading NRG