As fears Greece may leave the Eurozone have increased, investors have been reducing positions in most liquid “risk” assets and have been moving into cash and G-3 bonds issued by the U.S., Japan and Germany.
The selling of gold is a normal initial reaction to a risk-off event, as gold is generally held as part of investors’ risky asset pool and often sees selling along with other risky assets during the initial phase of a sharp market sell-off, such as the third quarter of 2008.
However, with some form of break-up of the current configuration of the Euro increasingly likely, once this initial phase of selling ends, investors will likely re-focus on finding alternative stores of value, with gold standing out as the ultimate alternative hard currency. [Gold ETFs Break Long-Term Trend Line]
With central banks remaining strong net buyers of gold so far in 2012, monetary policy expected to remain highly expansionary, China gold imports through Hong Kong at an all time high in March, and India removing its gold excise tax, medium-term fundamental support for gold appears strong.
Net speculative longs in the futures market dropped to the lowest level since December 2008 last week, indicating gold may be approaching levels attractive to longer-term investors.
Markets are likely to remain volatile this week and remain in risk-off mode, with uncertainty over the future of the Eurozone prevailing despite the EFSF agreeing to provide another billion dollar payment to Greece.
Precious metals investors will be closely watching the wording of the FOMC minutes for signs of potential future easing.
ETFS Physical Swiss Gold Shares (NYSEArca: SGOL)