Implications For Gold In The Aftermath Of The Greek Crisis

Tyler Durden's picture

With the euro having dropped substantially from a high of around $1.51 to less than $1.40 in the span of a few short months, it has sent gold buyers looking for cover, mostly as a function of the linear (and at times sigmoidal) inverse correlation between gold prices and the DXY which throughout 2009 has held surprisingly strong. Yet will a dollar scramble prove that the recent flight to gold has been premature? BofA believes that while the near-term implications for gold are as of yet undecided, relying on both € (bearish) and risk (bullish) signals, the long-term drivers for gold should be price supportive, especially for EUR-based investors. Proper positioning can be adopted using OTM gold calls, which are not only no longer as rich as they were a mere month ago, but would benefit substantially should Greece indeed follow through with an actual default and result in a flaring of all risk indicators, further precipitating a flight to euro alternatives, among which the dollar, and gold, are dominant.

Bank of America suggests:

In the case of an actual default, even an orderly one, increased systemic risk is likely to support gold prices as investors look for a safe haven. The more disorderly the default turns out to be, the more upside we see on gold. However, if Greece just muddled through the crisis or ends up being bailed out, gold may not fare that well. If the Greek problem does not spread to other countries in the Euro area, gold prices are likely to suffer due to a weaker EUR against the USD.


[T]he long-term consequences of Greece’s debt crisis for gold prices are clearly constructive, in our view. Emerging Market central banks are ever more aware that gold is one of the few viable alternatives to the USD. A deterioration of Greece’s creditworthiness, even if bad for the EUR, should support gold prices in the long run, in our view.

The main question, as discussed previously, is how will EM central banks decide to allocate their trade surplus FX reserves. Contrary to some gold-bearish perceptions, it is very likely that an increasingly deteriorating Greek situation, will force EM CBs not only to unwind € holdings and use the resulting capital to purchase dollars, but to augment their gold reserves as well. Thus the price determining factor will be decided in the marginal scramble for dollars versus gold.

Emerging market central banks (EM CB) are ever more aware that gold is really one of the few viable alternatives to the USD. Top holders of currency reserves like China, Russia or India will likely need to increase their exposure to gold over the coming months and years as the value of fiat currency reserve holdings like the USD or the EUR comes into question. The obvious problem with diversification is that there is simply not enough gold to go around. So a deterioration of Greece’s creditworthiness, even if negative for the EUR, should be supportive of gold prices in the long run, in our view.

And with gold prices still, presumably, reflective of a dollar-destruction rampage courtesy of the Federal Reserve, what would be the proper way to express a cheap bullish bias toward a spike in gold prices should a risk-flaring episode come back once again? BofA suggests that clients look to gold OTM calls, which are no longer a ripoff compared to ATM calls. In fact the call skew in gold, which still bullish, is half as expensive as it was on November 20, 2009. Yet investors most likely to benefit from such appreciation would likely not be USD-based speculators but those found in a EUR regime.

In our view, gold OTM calls look appealing for investors willing to play a potential Greek default through the gold market. Volatility levels have been declining and 3M ATM implied vols are now trading at levels last seen in late 2007. While the gold options market continues to price in appreciation, together with the CNY and the JPY, the call skews in gold have become less pronounced. That is, OTM calls are no longer as rich as they used to be when compared to ATM calls. In the event of a default, gold prices and volatility are likely to spike. If Greece’s problems are contained and the EUR (and gold prices) suffers, investors are protected on the downside. USD-based investors may find gold to be an ineffective hedge in this event. However, EUR-based investors could, in our view, hedge by buying gold calls in EUR, as the price of gold in EUR terms should remain well supported.


The biggest concern for outright gold longs will be whether the transfer in mentality from one of continuous dollar debasement in which the demand would come from traditional USD-based investors seeking to hedge and capture stock gains by allocating increasing capital to gold, to a perspective of gold as an increasing investment allocation for central banks, who seek to abandon the euro as a capital flow and pursue less risky exposure. Should this increased central bank demand be coupled with lack of incremental selling by those who already are in possession of Gold spot and future positions, and the probability for increasing gains in the fiat-alternative seem to accelerate. Lastly, for some additional insight into the crystallizing plight of the German government vis-a-vis Greece, as well as the increasingly torn fabric of the European Monetary Union, we strongly recommend the latest piece by Evans-Pritchard, "Should Germany bail out Club Med or leave the Euro altogether?"


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
etrader's picture

Greece has around 112 tonnes of Gold.

That could potentially be off loaded into the market  as part of its debt restructuring program.


10044's picture

true, BUT if anyone were to offload gold, it would be the IMF and as soon as they do, the Chinese are there to devour it, heck they might even buy off market prices.

etrader's picture

Shame BofA have overlooked this  potential 112 tonne supply overhang.?

steve from virginia's picture

What was that you say?

Greece has 112 tons of debt? Since when are they weighing debt? That's bad ...

Anonymous's picture

BUT that is awesome your thesis is based upon the actions of china.

Really, the shortcoming of mises is that given liquidationist theory assumes government screws the little people under the fed and how is china succeeding?

a lot of bankruptcy has occurred, where is the private society? Mises ouch.

Reven's picture

Greece has a GDP of $357 billion (2008).  112 tonnes of gold is only about 1% of their GDP and debt.

abalone's picture

Will the RBA's decision to raise interest rates in Oz reignite the USD carry trade later on this week in turn strengthening gold as inflation starts to rear its ugly head?

SteveNYC's picture

I think the RBA may actually stand pat on rates this time around. However, they have done stupid things before, raising rates may strengthen the dollar, which is not what they need right now.

I'm 50/50 for a hold this time.

Master Bates's picture


1.  Deflation, not inflation.

2.  USD rally.

3.  Gold breaks down from a descending triangle and plummets as the "gold bitchez" crew dumps.

The markets are on the brink here, and that includes all commodities too.  Pretty much all charts are bearish although potentially are bullish for the next week.

dark pools of soros's picture

have you crushed your balls straddling that fence yet?

MsCreant's picture

That is a really strange Master Bates technique.

Crime of the Century's picture

Strokes of something other than genius...

Hephasteus's picture

I think he's hanging from the fence upside down with the points of the fence skewering through his man sacks while singing a wonderful rendition of "Noboy knows the trouble, i've seen. Nobody knows my sorrow." In a strange tenor voice.

Mr Lennon Hendrix's picture

Deflation vs. Inflation gets a second round.  Deflation won the last round 10 to 9.  It really did get close at the end, with gold's winter run up, not to mention Britain and China admitting inflation had commenced.  I am looking for a second round knockout from inflation.  Bernanke is back and with his lucky printing press in his corner.  gold and silver snitches....

abalone's picture

Gold is teetering on the edge & BB's pill press (sorry printing press) stalling! Which way it goes tomorrow is critical. Another sell off would re-affirm deflation where as the usual Monday pump by the FED will confirm that the PSi levels are maintained.

THE DORK OF CORK's picture

Etrader it would be interesting to see the Greek reaction to the selling of its families gold.

We could see these events moving from the economic to the Geopolitical sphere

I am no expert on Greek affairs but I can imagine the Greek army having a more important role in politics all of a sudden

Has anybody got any information about the role and importance of the Greek military in the political game at the moment

peaceful's picture

good observation dork.. the scoop is that after the 7 yr regime of the colonels, greeks flocked to the left . The country at least until now, gives very little power to the military. The guy to watch for is Samaras--he may change this as he just won his party's election. He actually has some ties going all the way back to the colonels and he won the election on a somewhat "nationalistic" platform.


xamax's picture

Mid and longer-term, this totally failed construction called European Union is not sustainable. Greece is only the top of the iceberg while Germany is by far not so strong as generally assumed. Sure UK has its problems but at least they were not so stupid to join the Euro.

Here a personal example on how the EU works:

A friend of mine works for the European Central bank (EZB). While he takes a nice salary, he is allowed to work more than half of the year fom home (home office). They have 2-3 times a year a so-called study trip (usually in a 5-star hotel) and can bring their partner with them (useless to say that all is paid by the EZB). That's how it works.      

Anton LaVey's picture

1) It's the ECB, not the EZB (easy bee?)

2) Perks & all-expenses paid trip: how is that different from hundreds, nay, thousands of corporations out there?

You need to get around more.

Oh, and if you think Greece is a problem for the Euro, just wait until the UK defaults on its debt. That will do a lot of good to the pound sterling.

10044's picture

The best clue to go long on gold came last week when [the criminal] Soros said gold's in a bubble. If he 'says' or 'indicates' he's selling, that's your clue to buy, because definitely he's a buyer.

WilliamShatner's picture

I found it an odd statement, coming from Soros. 

He went long on gold starting 2 or 3 years ago, buying physical gold and shares in mining companies.

If you put his recent comments in context you can see he was saying that unsound fiscal policies by governments and the printing/creation of currency are setting the stage for gold to be "the ultimate bubble".

Wake me when the gold bubble gets as big as the dot com or real estate bubble, until then I'm continuing to buy gold.

10044's picture

"Wake me when the gold bubble gets as big as the dot com or real estate bubble, until then I'm continuing to buy gold."

sure, that'd be when it his $7k+

Hephasteus's picture

Spends all day remodeling and repainting his gold. Man maintenance on this stuff is a bitch and expensive. I now know why it's so cheap.

DavosSherman's picture

Agreed. Most folks the only gold they own is a gold ring, earrings or necklace. I haven't seen bidding wars or folks whipping out credit cards to buy it. Soros also holds as of Oct 09 263 million of GLD.

MarketTruth's picture

Soros hold GLD... hmmm, maybe he knows they need to dump those tungsten plated gold bars for those with actual gold within them so is trying to lower the price of real gold bars?

Frankly, Soros must have an angle as only a fool would have anything to do with the GLD scam other than for perhaps a day trade.

ASK YOURSELF: do you really trust that these ETFs have the gold they claim and GLD's counterparties that store said gold are not leasing it out or creating/forming/leveraging some other paper gold on top of their paper gold. As an example, GLD can hold NOT GOOD bars for proper delivery to the market and they do not insure their gold holding. Add to that, there are many other serious situations one should consider before choosing GLD or other ETFs.

Read GLD's 10-k filing at and pay special attention to pages 54 to 62.

Bottom line, if you want to invest in gold i would do as GLD's largest shareholder did months ago.... they sold their GLD holdings and purchased physical metal and took delivery. In this day and age counterparty risk is to be avoided imho.

dark pools of soros's picture

i heard Mr T is shorting gold next week

TheGoodDoctor's picture

The gold ETF's are nothing more than the same thing that the banks do with their leverage. And if the COMEX is not delivering physical, then what is one to assume?

Master Bates's picture

Real estate bubble, up 60% over its course.

Nasdaq, up 2-300% max over its course.

Gold up 400% over its course.

How is that not a bigger bubble?

hack3434's picture


Real estate bubble, up 60% over its course. USD coming down from the 120 peak

Nasdaq, up 2-300% max over its course. USD@120+-

Gold up 400% over its course. USD<80+-

How is that not a bigger bubble?

You do the math...


etrader's picture

To quote:

"When I see a bubble forming I rush in to buy, adding fuel to the fire. That is not irrational" -( From Soros Introducing the theory of reflexivity).

Thats what the mainstream outlets missed when interpreting Soros bubble remark

last week.

spekulatn's picture

Thats what the mainstream outlets missed when interpreting Soros bubble remark


Mainstream outlets are part of the wall street machine.

Nothing was missed.

Report the zig while the chosen 1'z do a  zag.


Mr Lennon Hendrix's picture

Great quote; the mentality stands correct with GLD in respect to radar SoroS and his cronies.  have fools invest in gold etfs, have soros do it, have fools feel comfortable, have gold go up to $10,000 an OZ, announce that the gold is not real real gold, fools lose.  poor fools.  and i forgot to add the part when soros pulls his shares out before the news hits the street.  easy money, buy physical.

SDRII's picture

Putting aside structural flaws in the Euro construction, Jesse has the appropriate chart up on who own the gold...

Browns bottom and rumors of trouble in the
London Bullion market only compound the problems of overreach and bankruptcy. Perhaps that accounts for the strident Labour calls for action on Iran. Germany on the other hand is strinking business deals.

Greece = proxy. With the US flexing its military muscle in China this weekend re Taiwan, are their similarities to be drawn to the US threat during Suez to dump Sterling bonds?

caveat emptor

10044's picture

I totally forgot about LBMA's thing... absoloutely right, cirmex and LBMA could 'both' go broke if delivery fails. one can only hope (not Obama's kind of hope)...

Anonymous's picture

OT No hijack intended...

Morgan Stanley looking into legal action against ZeroHedge

At the beginning of the week, financial research firm and industry online publication The Davian Letter posted a story that compared a Morgan Stanley research note written by Jim Caron to a story published by Tyler Durden at Zero Hedge. The Davian story laid out an argument that Zero Hedge was taking data charts fromMorgan Stanley research and printing them as its own. Phrases like “serial plagiarism” and “stealing of intellectual property” were thrown around. At first, it wasn’t clear if this was nothing more than a blogger war between two sites, which make their mark publishing unique market views, trying to clock the other out.

Then on Tuesday, Davian published another example that got the attention of the bank’s research team leader, who sent the post to his legal experts to determine if there was any real wrongdoing. Caron told the Greenwich Time he’d didn’t read ZeroHedge before this and had no further comment.

Today, we learned Morgan Stanley isn’t going the take the alleged research lift by online publication Zero Hedge lightly.

In a letter seen by Greenwich Time, Mitchell Bompey, executive director of legal and compliance for Morgan Stanley, writes “Morgan Stanley greatly appreciates your post by Dexter Morgan on Tuesday, January 26, 2010, exposing the plagiarism by Zero Hedge of recent Morgan Stanley research. We are reviewing that site now for possible legal action. Without your article, this abuse of our intellectual property may have gone unnoticed.”

A spokesperson for Morgan Stanley would not comment on the type of legal action the investment bank is thinking of taking against Zero Hedge. While we did hear a lengthy explanation from Zero Hedge that almost sidestepped the issues at hand, those connected with the Web site would not comment on the record, so unfortunately we can’t give you their side of the story. But we have no doubt they will publish one, on their own site, after this news comes out.

merehuman's picture

ZEROHEDGE is my truth in finance hedge. I am everyman and no man begging you all to PLEASE  

dont mess up zerohedge.

lynnybee's picture

.... my thoughts exactly...... love ZEROHEDGE ...... you find the truth on ZEROHEDGE ......sincerely.....

faustian bargain's picture

Um, yeah, I think you did intend a threadjack. 

MsCreant's picture

And then some. Not exactly a unique post.

Hephasteus's picture

It's kind of funny when you think about banks thinking they possess intellectual property.

I heard freddie and fannie made up a few hundred thousand counterfeit houses.

It's amazing that you can build houses with your mind.

Anonymous's picture

USD will be lifted by the Greek drama/comedy. Whatever is done in Europe to resolve the crisis will damage the Euro and the European union.

Plan on what you will do if gold goes down in USD terms.

Anton LaVey's picture

USD up, Euro down.

Most European countries are export-oriented countries. A cheap Euro makes their exports more competitive.

A strong USD is also a strong argument for investing in US Treasuries, which is exactly what the US Government wants you to do right now.

A match made in heaven.

Madcow's picture

Greece could sell their gold. So could the IMF to finance the bailout de jour. But there's a whole lot more "bailout" in the pipeline than there is gold. 

The amount of fiat money (both official and "shadow") that has vaporized DRARFS the total amount of all gold that has ever been produced. 



jimmyjames's picture

Zimbabwe-Iceland-Argentina-Viet Nam-Greece--Ireland-Spain--

All the Baltics in fact--N Korea

No majors--yet--but the ripple effect is in play--

The list gets bigger

Soon we'll be talking majors--

Yen/GBP/CAD/Yaun/EUR ?

Which will be sold down first--don't matter--

They all wait in line--this is genetic--

Their incestual relationship dooms them all,in the end---

Gunther's picture

To me the way suggested to play a Greek default does not make sense.
Gold options denominated in US$ plus currency conversion to Euro is possible but a short Euro/long US$ should bring the same result with appropriate leverage.
In case things spiral out of control after a possible Greek default something without counterparty-risk  seems a way better bet. Farmland, canned food, gold and for yanks guns and ammo come to mind.

Anonymous's picture

As investment returns come back, gold will go down.

It doesnt carry well in a positive investment climate.


Anonymous's picture

like from 04-08 ? drivel

hack3434's picture

Lol I remember when flipping houses was cool and everybody and their cousin had a realtor license. Invest! Invest!!! 

Anonymous's picture

So BoA - via Zero – wants us to:

1. Remind ourselves and contemplate for a moment, in silence, on how the USD and gold are alternatives.

2. Greece muddling through to the other side, so that the EMU does not implode, is somehow USD positive.

3. If Greece on the other hand explodes, EMU implodes (and therefore USD gains over the EUR, which rates such an event as USD positive), well - if such be the case - then gold will surely surpass the USD.

3. BoA then sees how EM CBs - in their view - see gold as one of a “few viable alternatives” to the USD, again?

4. Hence, BoA, via Zero, concludes, that further rise in the price of the Greek »sovereign CDS« (over the Califlowernia one), though LT EUR negative, should nevertheless support the PoG (& let’s leave the USD out of this one).

5. Then, let us remember that EM CBs see gold as one of a “few viable alternatives” to the USD, again.

6. Despite that, the EM CBs will – nevertheless - find out that they have to hold more gold because the gold is not in fact an alternative neither to the EUR not the USD but they will find no more gold available, at such point, to “go around”.

7. So, to summarize: “To you, you E(M)U based targets - the gold options market continues to price in appreciation, together with the CNY and the JPY, the call skews in gold have become less pronounced, that is, OTM calls are no longer as rich as they used to be when compared to ATM calls ( = an end of a rip-off). Join our “sovereign CDS” spread pumping game and enter these gold calls so that, in the end, you too just like EM CBs, will find no more gold available to “go a round”. The last fool.

If such is the talent in banking then surely, I am excused for the length of this post. Same - as for talent - goes for both posters, that rated the above pile of bollocks with 5 stars.

Anonymous's picture

112 tons = approx 3.5 mil ounces and $1,200 an ounce = roughly $4 billion unless my math is wrong of course.

Their debt is 300b Euros?