Greece and Gold: Is There a Correlation?

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 |  Includes: ERO, EU, EZU, FXE, GDX, GLD, IEV, VGK
by: Old Trader

Like just about everybody else, I’ve been following the problems within the EU, generally, and the bailout of Greece, specifically. The “plan” announced a few days back, a joint EU/IMF loan of $145 billion, doesn’t seem to have done a lot to reassure the markets.

First, the “solution” is more of a temporary band aid, than a cure, as many smarter than me, have pointed out. Additionally, the focus is turning towards the other “weak sisters” within the EU, as well as non-EU nations on somewhat shaky ground, debt-wise.

Should additional bailouts be needed, say of Portugal and/or Spain, just how expensive could this be, and just how much “dry powder” is available to the IMF, and others to fund same? I found myself wondering if it should become necessary for the IMF, and/or central banks to sell off some of their gold holdings to help finance such assistance to nations in trouble?

If something along those lines did, in fact happen, what would the effect on the price of gold be? At first blush, one could logically assume that the price would weaken, as additional supply comes onto the market. Of course, following “logic” has not proven to be an especially profitable trade, lately. I suspect that it's equally likely that gold would surge sharply, since an action such as selling gold to increase liquid reserves, might easily be seen by the market as an acknowledgement that the situation is MUCH worse than the people at the top are comfortable with.

An announcement is due before the Monday market opening, as to what additional steps might be taken to return a measure of stability, and to calm investors’ jangled nerves.

Disclosure: Author holds a long position in GG