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Gold and Silver Rise as "Default-Event" Greek Rescue "Only Delays the Reckoning"

Commodities / Gold and Silver 2011 Jul 22, 2011 - 06:49 AM GMT

By: Ben_Traynor


Best Financial Markets Analysis ArticleWHOLESALE PRICES to buy gold rose to $1597 per ounce Friday morning in London – some 0.7% below Tuesday's new record high – as global stock markets, commodities and US Treasury bonds all rose following last night's announcement of a new rescue deal for Greece.

Silver bullion prices also rose, hitting $39.76 per ounce and heading for a 1.2% weekly gain.

Dollar prices to buy gold were broadly in line with where they started the week, but gold stood 0.8% lower against Sterling and 1.2% lower vs. the Euro.

"[The Greek bailout] could prove to be the start of a solution to the European debt crisis," says one gold bullion dealer here in London.

"But it could simply be a move to delay the final reckoning for Greece. The markets will take a little time to make their mind up."

The Greek bailout announced after Thursday's emergency summit in Brussels includes €109 billion in Eurozone-funded loans – extra to last June's €110 billion rescue – plus an estimated €50 billion "contribution" from private-sector bondholders.

"The financial sector has indicated its willingness to support Greece on a voluntary basis," said the European Union statement, also outlining further aid from the €440 billion European Financial Stability Facility.

Like Greece, both Ireland and Portugal will also see the interest rate on their EFSF loans cut to just 3.5%.

Private-sector holders of Greek bonds, in contrast, will be given a "menu of options". One involves rolling over existing bonds for 30 years at an interest rate of between 4% and 5.5%. Another would see new 30-year bonds paying up to 6.6%, but only with a 20% haircut (ie, loss) on bondholders' existing capital investment.

Ratings agency Fitch responded by saying Greek bonds could be given a "restricted default" rating, because "an exchange that offers new securities with terms worse than the original contractual terms of the existing debt...constitutes a default event under Fitch's 'Coercive Debt Exchange Criteria'."

On the open market Friday morning, the yield on 30-year Greek government bonds was trading at around 10%.

"These measures...create the best possible conditions for Greece and other peripheral countries to put their houses in order and hence limit the risk of contagion," reckons Marco Valli, chief Eurozone economist at UniCredit, Italy's largest bank.

"Still, the market will continue to price some probability that troubled countries will not be up to the challenge."

"The EFSF has gone from being a single-barreled gun to a Gatling gun, but with the same amount of ammo," says Citigroup chief economist Willem Buiter.

"It needs to be increased in size urgently."

Euro prices to buy gold rose above €1109 per ounce Friday morning, recovering one-quarter of the 4.1% drop from Monday's new all-time highs.

Ongoing debt concerns in Europe and the US "are unlikely to dissipate just yet and would limit any pullback for gold," reckons Andrey Kryuchenkov, London-based analyst at VTB Capital.

European Union member Bulgaria said Thursday it will delay talks on joining the Euro currency indefinitely.

The Moody's rating agency today upgraded Bulgaria's government bonds, praising the "strong liquidity and capital buffers of both the financial system and the government...sufficient to absorb shocks deriving from regional volatility."

Meanwhile in Washington, US President Obama said he is "willing to cut historic amounts of spending in order to reduce our long-term deficits," in an opinion piece published in Friday's USA Today.

Obama adds that he would not make many of these cuts "if we didn't have so much debt".

The US Senate is expected to reject the so-called Cut, Cap and Balance bill after it was passed by the Republican-controlled House of Representatives on Tuesday. The bill calls for a balanced federal budget to be enshrined in the US Constitution.

"US debt talks are only of mild interest to me," says one gold bullion trader in Singapore.

"The more important thing is the long-term implication – US government bonds used to be called a 'risk-free asset' and now we are seeing that concept fade away."

By Ben Traynor

Gold price chart, no delay   |   Buy gold online at live prices

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

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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