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Gold Prices and the "Grexit" Effect

Lately gold priceshave been affected by a strengthening dollar resulting from troubles overseas.On Tuesday, Greek Prime Minister Lucas Papademos told Dow Jones Newswiresthat considerations were being made for a potential exit by Greece from the euro. He also warned that such an exit would be “catastrophic” for the country and that fallout across the entire Eurozone would be severe.Concerns over what will happen to Greece and the Eurozone if Greece leaves have caused the euro to drop to $1.255, its lowest level against the dollar since July 2010.

These issues have led to a rising dollar as investors continue to move out of gold and into the dollar.

Now The Balance Begins To Shift

The balance between QE and Treasury supply will begin to shift in July. The underlying bid it has provided for stocks and Treasuries will begin to fade.

This report tells why, and what to look for in the data and the markets.  GO TO THE POST

“Not surprisingly, Greece is the biggest single factor behind the move [out of gold and into dollars],” said Money Morning Chief Investment Strategist Keith Fitz-Gerald on May 11. “Traders are concerned that the nation will summarily go its own way, shatter the EU’s bailout and potentially sink the euro itself.”

Constant worries loom of a “Grexit” as European leaders met in an informal summit in Brussels today (Wednesday) to talk about the debt crisis and how best to spur growth in the struggling Eurozone.

The meeting comes a day after the Organization for Economic Cooperation and Development (OECD) issued a warning that the 17 countries that use the euro risk falling into a “severe recession.”

“The crisis in the Eurozone remains the single biggest downside risk facing the global outlook,” said Pier Carlo Padoan, chief economist for the OECD.

So just how low can gold prices go?

The Gold Prices Pullback

After peaking at an intraday high of $1,920/oz. last September, gold is down almost 20% from that level. Gold has been down more than 2.5% Wednesday, crossing the $1,540 line.

The yellow metal has fallen during the past three months and can’t seem to get up – a very rare sight.

Since 1957, gold prices have fallen three months in a row 65 times out of a total of 661 three-month periods, according to data compiled by Bloomberg and Standard and Poor’s.

But as Fitz-Gerald explained, this is not really a bad thing in the bigger scheme of the gold market.

“People forget that gold prices fell by more than half from 1975 to 1976, and were down 17 out of 24 months,” Fitz-Gerald wrote earlier this month. “At the same time, gold prices also recorded 10 three-month declines during the period. That was, incidentally, right before gold rose 721.25% to $850.00/oz.– a peak gold hit on January 21, 1980.”

What does this tell us?

“The point is, bear tracks always precede bull market runs,” said Fitz-Gerald. “So I am not especially concerned by this pullback in gold.”

Time to Buy Gold?

So when will the gold price slide stop, and when should you buy?

As I write this article, gold has been trading between $1,530 and $1,540, and could be on its way to $1,500.

Fitz-Gerald thinks that’s a good entry point if you’re a short-term trader.

On May 11 he wrote, “… gold has broken under $1,600 for the first time since December 30 and we’ve seen the first close under $1,600 this year. If it busts $1,500/oz., backing up the truck for gold is probably a pretty good idea. At $1,300 it’s time to load up.”

For long-term investors, Fitz-Gerald recommended making measured investments. These could include, for instance, increasing allocations to bullion, gold certificates, coins or ETFs as the price drops.

Whether you buy gold at $1,500, $1,300, or $1,600 you will make a decent profit when gold reaches $2,000.

As Fitz-Gerald points out, it is only a matter of time before people come back to gold.

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