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Gold "Crisis Protection" Proven as Eurozone's Greek Bail-Out Begins

Commodities / Gold and Silver 2010 Apr 23, 2010 - 09:05 AM GMT

By: Adrian_Ash

Commodities

THE PRICE OF GOLD retained a slight weekly gain as the close approached in London on Friday, trading above $1141 an ounce while the Euro bounced – and world stock markets rose – following Greece's formal request for a joint European and IMF bail-out.


Gold priced in Euros spiked within 0.3% of April 9th's record, hitting €27,743 per kilo before easing back as the single currency rose.

British investors looking to buy gold, the price held at £743 an ounce – 0.3% higher from last Friday's finish – after UK data showed the economy growing half-as-fast as analysts forecast between Jan. and March, adding just 0.2% year-on-year.

Crude oil and broader commodities were little changed.

"Greece is asking for the activation of the support mechanism," said a letter sent this morning by finance minister Papaconstantinou to the European Commission, fellow Eurozone states, and the European Central Bank.

"The moment has come," Greek premier Papandreou told reporters, apparently catching the European Commission unawares.

First it denied receiving a formal bail-out request. Then the EC said it will take "some time" to trigger the rescue, currently agreed at a maximum €45 billion (£60bn).

Thursday had seen Greek bond prices sink to new crisis-lows, driving the yield offered by two-year debt above 10%.

As Greek bonds rallied on Friday, German Bund prices ticked lower alongside UK and US Treasury debt.

Germany's Dax rose 1.4% by lunchtime in Frankfurt. Athens' stock market jumped almost 2%.

"Although gold's Dollar-price may still be 6% below its late-2009 highs, in Euro terms gold prices are up 6% from their Dec-09 peak," notes Patrick Artus' team at French bank Natixis.

"This demonstrates gold's ability to protect investors from crises that debase their own currency, but not those of other sovereign issuers."

"German investors have not been put off by the all-time high expensiveness of gold in Euro-terms," reports Wolfgang Wrzesniok-Rossbach from Hanau-based refinery group Heraeus.

"The Greek financial crisis continues to drive investors here to the yellow metal."
 
Industrial demand, in contrast, "has shown a slight reduction in demand – current price levels appear to be simply too high," says Wrzesniok-Rossbach.

"Even at record prices of almost €865 an ounce" however, scrap-gold flows into the refinery "have slowed down in recent days," he adds.

Over in the credit-insurance market, the cost of protecting Portuguese government bonds also slipped back on Friday – together with Greek credit-default swaps – from yesterday's new record highs.

"The market believes that Greece will be forced to restructure its debt," says Simon Derrick at Bank of New York Mellon in London, and "The logic of such a situation for [Greek bond] investors is also simple enough:

"There is no last mover advantage in such a circumstance.

"We also note outflows just starting to build from Portuguese debt in recent days," Derrick is quoted by the FT's Alpha blog, "although they are still relatively modest."

Precious-metals analyst Walter de Wet at Standard Bank also notes fears of Euro-debt contagion today, writing "We doubt [the Greek rescue] would be enough to lift concerns over sovereign debt levels in certain European countries."

Even though the physical market is currently "quiet and directionless", de Wet reports, "Underlying uncertainty should continue to support gold."

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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