A pretty common question I’ve been asked lately is “Why is Greece affecting gold prices?” This is being asked for a variety of reasons, largely in response to Greece making gold prices drop several times this last week, and the fact that the Greek crisis is threatening to cause a new US recession.
So why is the Greece crisis making gold prices take a dive every few days? Is there any end in site? Does this mean you should buy, wait, or sell?
To answer these questions, we first need to be able to understand what’s causing the Greek crisis, what that is doing to the economy, and why gold prices are reacting negatively to that entire situation.
To summarize, the Greek crisis threatens the European economy which makes the markets drop in price, and that impacts gold because gold reacts to fears of recession.
That’s the extremely shortened answer to the question. But let’s answer it in more detail, because there are principles here that will let us understand the US economy better as well.
What’s Causing the Greek Crisis
The Greek crisis is essentially caused by the Greek government running out of money. It’s literally that simple. Their taxes were hit during the recession, and they have incredible amounts of spending.
Greece spends huge amounts of money on welfare programs that are usually just bad for the economy — but right now, they’re just deadly. They can’t handle the recession.
Unlike other countries that have control over their currency, Greece is in the Eurozone. This means that the European Central Bank — which is the bank for the 17 Eurozone member countries — controls their currency. This is bad for Greece because — unlike the US and other countries that have their own currency — they can’t create a little inflation to pay for stuff later.
Inflation is bad, but it’s even worse when your government doesn’t have inflation and is so stupid that it spends money like it does. That’s what Greece is doing. Greece is the epitome of economic and financial insanity. They’ve come a long ways since Aristotle.
Why the Greek Crisis Hurts Markets
The Greek crisis is hurting markets because they’re part of Europe — an important part — and many other national economies are tied directly to their economy. After all, if the entire East Coast went bankrupt and spending was drastically cut, the entire US would be thrown into recession — and the stock market of the US and the world would follow.
The markets would follow because if they economy is doing poorly, that means businesses and bonds are suddenly more risky with a little less profit being likely — they’re not worth as much as they were when the economy was doing great.
That’s why prices begin to drop and reflect the loss of income and increase in instability.
Why Gold Prices Are Reacting
Gold is a long-term safe haven. Gold is not a short-term safe haven. I can’t stress this enough. This means that gold could drop or go up in price in the short run… but over the very long run, it’ll likely stay flat or go up a little per year.
It’s been this way since the beginning. If you look at pretty much any gold price chart of the historical price of gold, you’ll see that this is true. Over a long enough period, gold does fine. But in the short run, it’s extremely volatile. This is why long-term gold investing is the best strategy, especially for non-economists or non-day traders.
What This Means for Us
As explained above, gold prices in the short run are volatile. That’s why you should adapt a long-term investing strategy. The best strategy for most people is the fail-proof portfolio that I discuss here.
Of course, it really depends on your understanding of the markets and whether you think you can succusfully navigate the economic news. Most people can’t, of course.
Soon, I’ll be discussing why Greece is different than the US. Our spending problems will have different problems in the future, because we have something Greece doesn’t have — the printing press. And that’s more than a little scary.
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