UBS Asks, 'Is Gold Ignoring Greece?'

July 1, 2015

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In a report published Tuesday, UBS strategist Edel Tully wondered why gold seemed to be so disconnected from the Greek crisis. He noted that "developments in Greece don't seem to be impacting gold in any meaningful way," at least relative to "how the market has reacted in the past."

Desensitization

Typically, gold receives a boost from financial uncertainty, as wary savers seek to transfer their wealth to a more secure commodity. But Tully said that this effect has been dampened in recent years.

He attributed this trend to "headline fatigue" resulting from heavy coverage of the Greek drama. He said, "the threshold for bad news is higher and it will probably take a lot more to trigger a significant wave of gold safe haven buying." Last week, Will Rhind, CEO of World Gold Trust Services, told Benzinga that volatility in gold prices had been on the decline since the beginning of 2015.

Tully only expects more significant movement in gold if there is a rapid deterioration of the situation in Greece over the coming weeks. He described such a scenario as one in which "Grexit occurs and there is no credible policy response."

UBS projects a 40 percent chance of Greece leaving the Eurozone and a 40 percent chance of other countries, like Spain and Italy, following suit.

An Established Position

Tully also noted that "market participants have slowly built up safe haven positions over time" and thus it was only natural for the response of gold to "fresh catalysts" to be less than it has been in the past.

"Whereas the gold fear trade was very strong" when the Euro crisis first erupted, he said, the effect gradually diminished "with each iteration" as cautious investors began hedging themselves in the commodity.

Tully concluded, therefore, that the dampened relationship between gold and Greece doesn't necessarily mean that it has been abandoned as a safe haven. Rather, he sees changes in gold positions over time as affecting changes "in its reaction function."

The SPDR Gold Trust (ETF) (NYSE: GLD) has been relatively stable today, hovering around losses of less than a percent. It's down about 1.2 percent year-to-date.