The Debt Crisis In The Euro-Area And The Price of Gold

The recent volatility in the stock markets of the world, the prices of precious and industrial metals and the price of oil can be attributed, in large part, to the swings in the hopes and fears that the Euro Area debt crisis will or will not be contained. News of riots in Greece, the spread of the debt problem to the large countries, Spain and Italy, lead to sharp drops in the stock markets and raise fears that growth in the economy of the Euro Area will suffer and spread to the emerging as well as the developed countries.

The latter in, turn, suggests lower demand world wide and hence the likelihood of price declines in industrial metals and oil. News that progress, however small, is being made in dealing with the problems leads to a reversal of the down trends only to have them reversed when the progress proves elusive. The recent intensification of fears about the Euro Area Crisis has led to some of the sharpest drops in the world's stock markets, the prices of industrial metals and the price of oil, as can been seen in the first three charts.

With gold's reputation as a safe haven in times of uncertainty, the recent sharp drop in its price, as shown in the fourth chart, is anomalous. Bad news usually sees a rise in the gold price, but here we have a 16% drop from $1,898.87 a troy ounce on September 6th to $1,601.370 a troy ounce , three weeks later on September, 26th, in the face of rising fears. Among the reasons given for the decline in the price of gold is that losses elsewhere have forced investors sell some of their holdings of gold or that some investors have begun to cash in on their long term gains. Another is a lessening of inflation fears as the Fed has adopted "Operation Twist" rather than additional quantitative easing. Whatever the reason for the drop, the future course of the price of gold is still likely to depend on the outlook for inflation.

Daily data for stock prices, the prices of industrial and precious metals and the price of oil can be found in the Haver Databases, DAILY, INTDAILY, CMDTY