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Gold Defies Surging Dollar as Debt Contagion Hits Euro

Commodities / Gold and Silver 2010 Apr 28, 2010 - 08:18 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleTHE PRICE OF GOLD in large, wholesale gold bars held near a 4-month high vs. the Dollar early in London on Wednesday, trading above $1162 an ounce even as the US currency hit a 12-month hit against the Euro on fresh political wrangling over the Greek government bail-out.


"It's not a question of the danger of contagion; contagion has already happened," said OECD secretary general Angel Gurria to journalists earlier.

"This is like Ebola...threatening the stability of the financial system."

Slashed to "junk bond" status yesterday by the credit rating agencies, Greek government debt continued to fall, driving two-year yields above 16%.

Portuguese bonds also sank after they were downgraded two notches to "A minus" by S&P.

US and German bonds eased back, while Asian stock markets extended Tuesday's slump in Western equities and the Eurostoxx 50 index pushed its week-on-week drop to 4.5%.

Crude oil ticked higher from $82.50 per barrel, but base metals fell for the second day running, dropping to fresh multi-week lows.

"The threat of contagion is what's driving the market," one London metals trader told Reuters this morning.

"Plus there are worries about China tightening its monetary policy, curbing demand."

Silver prices and platinum also extended their losses, falling to $17.87 and $1715 an ounce respectively.

For gold – the only "risk asset" to rise alongside triple-A government bonds, the US Dollar and Japanese Yen on Tuesday – "In the short term, there may be safe-haven buying," reckons Standard Chartered analyst Dan Smith in London.

"But I don't think that will be as important in the weeks ahead. The Greece issue won't derail economic recovery."

A "broadening economic recovery" will encourage the US Federal Reserve to raise Dollar interest rates, agree analysts at Goldman Sachs in a new report, also quoted by Bloomberg.

The Fed isn't expected to change policy – nor withdraw its "extended period" promise of zero rates – at today's meeting.

Still forecasting a rise in the gold price, however, Goldman Sachs cut its average target for this year by 8% to $1165 an ounce.

Next year's average price is seen 5% below the bank's 2011 forecast from January, at $1350.

Here in London on Wednesday, the AM Gold Fix was set by the biggest market-making bullion banks at the highest level since 8 Dec. last year.

Fixed at $1164.25 an ounce, that put gold some 4.5% below 3 Dec.'s all-time record vs. the Dollar.

Gold priced in British Pounds joined the gold price in Euros in setting new all-time highs near £768 and €884 respectively.

"UK politicians may hope that the Eurozone crisis will help bury the bad news of the likely hung parliament" after next week's election, warns Steve Barrow at Standard Bank today.

"But UK markets could still prove vulnerable, especially if it is clear that the new government won't last the course."

One of Britain's leading think-tanks, the Institute for Fiscal Studies, said yesterday that no political party had gone "anywhere near identifying" the public-sector cuts needed straight after the May 6th election, attacking Labour, Liberals and the Tory party alike for being "vague" with voters.

Following the Bundestag's block on accelerating €8 billion in German aid to the Greek government, IMF chief Strauss and ECB president Trichet are today meeting in Berlin to urge a settlement.

Some 56% of German voters are against helping fund Greece's deficit, according to the latest poll reported by Stern magazine.

"We fear for our money," said a headline in Germany's tabloid press today.

"You Greeks are getting nothing from us!" read another.

Looking at the impact of the global financial crisis on precious metals, "Even when economic conditions improve, investment demand is projected and expected to remain elevated," says the new Gold Yearbook 2010 published Tuesday by New York's CPM Group consultancy.

Demand for gold bars, coins, gold-backed trust fund structures and physical accounts has leapt since the interbank lending market froze in mid-2007.

"Just as people who lived through the Great Depression carried with them certain savings and spending habits borne out of that economic cataclysm, it is anticipated that individuals and institutional investors will retain for many years lessons learned related to the reliance on paper financial assets."

Kind regards,

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


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