By by Ben Traynor
Tues 10 May, 09:30 EST
Gold Close to New Euro High as S&P Cuts Greece Again, Warns of 50% Bond Write-Off
THE PRICE OF GOLD rose for the second day in succession in London on Tuesday, recovering half of last week’s 7% plunge from new all-time Dollar highs, as world stock markets also rallied again with commodities.
The Euro spot gold price rose above its peak of last week, trading at €34,028 per kilo after the Standard & Poor’s agency downgraded Greek sovereign debt to the same credit rating as Belarus, Europe’s lowest-ranked state.
Tuesday morning’s London Gold Fix in Euros was set less than 2% below late December’s all-time high.
“With the resurfacing of Eurozone sovereign debt concerns, we expect to see continued appetite for gold and silver,” says Leon Westgate, London-based commodities strategist at Standard Bank.
“Given the recent sell-off, expect to see a return of investor as well as physical buying in search of value.”
Short-term, the Greek downgrade “may provide a slight headwind for precious metals”, according to another spot gold dealer in London. But longer-term, “the same factors behind the Euro slip also favor gold and silver.”
An analyst from ratings agency Fitch told Reuters today that his agency is “actively reviewing” its rating for Greece.
Yields on Greek government debt fell slightly on Tuesday – down from 15.7% to 15.4% – as rumors circulated that Athens could receive another bailout.
Newspaper Kathimerini reported that the International Monetary Fund is lining up an aid package worth €80-100 billion, though it did not cite sources for the story.
Forecasting weak economic growth for years to come, the S&P ratings agency warned that Athens’ creditors “could eventually” face a 50% cut to their bondholdings “to restore Greece’s debt burden to a sustainable level.”
“Gold looks quite comfortable at $1500, and would profit from any escalation in concerns over Greece’s debt sustainability,” says Edel Tully, precious metals strategist at UBS in London.
However, “volumes are very light [in precious metals markets] and as such the potential for exaggerated price moves is quite high.”
Giant gold holder the SPDR Gold Trust – a physically-backed exchange-traded fund (ETF) that tracks the gold price – saw shareholder sales cut its holdings of physical gold bullion to a one-year low on Monday.
Down at 1202 tonnes, the $60 billion trust has shed 9% of its physical bullion since the peak of June 2010.
“We have seen a couple of [ETF] outflows over the last few days and this might have dragged the gold price down a little,” reckons Commerzbank analyst Daniel Briesemann.
“The decrease we’ve seen over the last week isn’t related to anything specific on gold.”
Meanwhile on Tuesday, latest figures showed that China’s trade surplus was $11.4 billion in April, nearly four times bigger than analysts had forecast.
China’s exports grew 29.9% year-on-year, while import growth was 21.8%.
“This number will likely add to the pressure from Washington for Beijing to allow faster currency appreciation,” said Brian Jackson, Hong Kong-based senior strategist at Royal Bank of Canada.
“But more importantly [the data] should persuade Chinese policy-makers that a stronger yuan can be tolerated by the economy and is warranted as part of their efforts to curb price pressures.”
Chinese vice premier Wang Qishan is currently in Washington D.C. for the annual Strategic and Economic Dialogue between China and the US, and the latest trade data “will likely provide a touch more ammunition for the US in the talks,” believes Alistair Thornton, economist with HIS Global Insight in Beijing.
Now holding Dollar interest rates at zero for 25 months running, the US will instead “argue that more needs to be done with the [Chinese] currency and interest rates,” says Thornton.
Ben Traynor
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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.
(c) BullionVault 2011
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