China, Greece & Gold

Why has the Gold price remained flat amidst Greek debt crisis and China's stock market correction? This is the question that most investors and traders ponder upon. Common knowledge in the field is that Gold rises in times of global turmoil.

"Global" being the key word implies that if a current event or situation stays inside a country or a region, Gold would not react as much as if it were to spread to different territories and places.

Let's start with Greece. The reason that Gold did not react to the Greek referendum result was that the event was localized. Local events are not anticipated by Gold, because they do not affect the global economic situation. If the risks are not contained then we would get something called "the spillover effect", meaning that the impact from the Greek default would be felt throughout the Eurozone and the EU as a whole.

Now to China. Market participants expected that the 25% China stock market correction would trigger a flight to safety. But Gold price remained unchanged. We believe that this is because market may expect that the Chinese government would act accordingly and contain the fall.

Let us not forget about the competition between the U.S. Dollar and the yellow metal. A strong dollar means pressure on Gold's price.

But history repeats itself and Gold is still a high quality liquid asset that could be used to protect oneself from falling market prices, deteriorating market conditions and negative overall market sentiments. We have seen this behavior before - during the global financial crisis of 2008 the price of Gold fell for quite a while only to rise back up again. So if these current situations turn into systemic risks we would see a renewed inflow into Gold that would boost prices. And again there will be surprises.