The news Sunday from Greece of the vote in favor of additional austerity measures is an early Valentine's Day gift for investors in gold. Why? Simply put, a disorderly default by Greece would have significantly strengthened the U.S. dollar and hit gold prices hard. Let's review the charts.
Gold, denominated in U.S. dollars, had already been affected by the ramp up in Greek drama late this past week. As concerns mounted that Greece would not be able to commit to further austerity measures required by European officials, the U.S. dollar began to gain steam and gold plummeted.
The chart below displays this dynamic using GLD, the largest gold ETF, as a proxy for gold versus the U.S. dollar. Note the spike in GLD as news broke mid week that Greece would initially receive the bailout. Then witness the subsequent decline in GLD and rise in the U.S. dollar as concerns peaked through the end of the week that Greece would not be able to approve the additional austerity measures.
Investors in gold of all forms clearly received an early Valentine's Day gift from the Greek government on Sunday night. To what extent it's hard to say, but one recent chart can give us an idea. Again, using GLD and the U.S. dollar, we can quantify the pain gold faced in December of 2011 as the U.S. dollar benefited from a flight to "risk off" assets due to EU drama.
In less than a month gold lost around 10% of its value as the U.S. dollar gained close to 2.5% in value. That 12.5% difference in performance is a fair estimate of the size of the Valentine's Day gift from Greece to owners of physical gold, not to mention shareholders of gold equities.
While the drama in Greece is not likely over, it appears for now that a disorderly default has been avoided. This bodes well for gold as it continues to surprisingly compete with the U.S. dollar for investor assets during uncertain times. After all, a review of the 10 year chart of the U.S. dollar versus gold displays a stunningly lopsided performance difference of more than 500%.