Another round of talks between Greece and its Eurozone creditors ended on Monday without an agreement on an extension to Greece’s bailout program. The current package expires on February 22, so the time is running out quickly, increasing the market uncertainty and fears about Greece exiting the common currency and the future of the Eurozone. Indeed, the probability of the Grexit was raised from 25 to 50 percent by Commerzbank AG, just after another failure of negotiations.

In the last article covering this issue, we wrote that prolonged negotiations would be bullish for the gold price. However, the gold price fell from almost $1,225 to less than $1,205 at one moment during New York session. How can we explain this fact?

Many other factors could counteract the Greek positive impact on gold prices, such as technical factors, concerns about low physical demand with the Chinese New Year or fear that the Fed will hike interest rates as early as in June. However, we would like to point out the expectations that the ECB is unlikely to cut off Greek banks from the emergency funds during its bi-weekly ECB review of the Emergency Liquidity Assistance limits for Greek banks. Why is this so significant? It shows that the most important thread of the Greek drama is not the public debt, but perhaps the banking sector, which is to a large extent dependent on the ECB’s funds.

The Greek banks are running out of money, as depositors fear a Grexit and are withdrawing their capital from domestic banks and shifting it abroad. They banks have already lost €21 billion since the beginning of 2015, which is the reason why in February the ECB increased the Emergency Liquidity Assistance available to Greek banks by about €5 billion to €65 billion. This is why we still believe that the Greek government will eventually reach an agreement with its creditors. Otherwise, its banking system could be destroyed, possibly triggering a Grexit.

The bottom line is that Greece has problems not only with public debt, but also with banks dependent on emergency funding from the ECB. It increases the Greeks’ motivation to reach a deal, however it introduces new problems into the drama, which may trigger a Grexit in the case of prolonged negotiations (the longer uncertainty lasts, the more Greek depositors are eager to pull out money from domestic banks). It also increases the potential repercussions of not extending the bailout program. In sum, the Greek tragedy still remains an important bullish factor in the gold market, which would increase European demand for the yellow metal, which is currently surging, even more.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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