Gold Rises to New Sterling High As Greece Debt Crisis Continues

By: Ben_Traynor

DOLLAR PRICES to buy gold rose to a high of $1550 per ounce on Monday morning – less than 2% off last month's all-time high – before slipping back slightly, while commodities were mixed and European stock markets rose.

Negotiations towards a fresh bailout for Greece continued, after an estimated 80,000 people protested in Athens yesterday against government cuts and privatizations. The protests have been running for 12 days.

Silver prices climbed to $37.54 per ounce – a 3.6% gain so far this week.

The price to buy gold in Sterling meantime held steady above £940 per ounce, after setting a record high of £945.66 at Monday afternoon's London Fix – and touching an intra-day record of £950 on the spot market.

"With global liquidity still rising, gold should push higher," says Walter de Wet, commodity strategist at Standard Bank in London. 

"Global liquidity is being driven not so much by the Fed anymore, but increasingly by government borrowing."

"I think the odds are stacked in favor of gold at the moment," reckons Darren Heathcote, Sydney-based head of trading at Investec.

"The market's still very sensitive to what's happening in Greece and Europe, and at the same time sensitive to US data," he adds, referring to last week's news that the US economy added fewer jobs than expected in May.

Plans to provide a further bailout to Greece remain "on track", and would not involve debt restructuring, acting head of the International Monetary Fund John Lipsky said Monday, as the debate continued over how much of the burden private sector debt holders should share.

The additional aid package – reported in Monday's press as likely to exceed €100 billion – will be discussed at a meeting of European finance ministers on June 20.

Any default by Greece would represent a "Lehman Brothers catastrophe" Olli Rehn , EU economic and monetary affairs commissioner, told reporters Monday, since Europe's banks – many of which hold Greek debt – remain "fragile". 

While it rejects calls for Greek restructuring, the European Central Bank "would consider [it] appropriate" to encourage investors to buy new Greek bonds to replace maturing ones, said ECB president Jean-Claude Trichet Monday.

"[But] there is no such thing as being a little bit pregnant," countered IMF senior representative Bob Traa in a speech in Athens.

"Once you unleash a restructuring scenario, this [would create] untold problems not just for Greece but also for the Euro area."

Meantime in Germany "nobody is really enthusiastic about new financial aid for Greece", Reuters quotes an unnamed member of parliament from chancellor Angela Merkel's camp.

"There is a widespread feeling of helplessness."

Over in Athens, Greek prime minister George Papandreou says he would, if necessary, consider holding a referendum on austerity reforms.

Papandreou faces dissent from within his own socialist PASOK party, some of whom have demanded each individual part of the austerity plan be handled in a separate vote.

"Even if [Papandreou] gets the medium-term economic plan through parliament, the political turmoil is likely to continue as a second bailout will also require a parliamentary vote," says Wolfango Piccoli, London-based analyst at political risk consultancy Eurasia Group.

Away from the European debt crisis, a senior official at China's State Administration of Foreign Exchange – the agency through which Beijing has opted to buy gold in the past – warned Tuesday of the "economic and political risks in excessive holdings of US Dollar assets." 

"The United States has taken an expansionary fiscal and monetary policy to stimulate economic growth, and...may find it hard to resist the policy temptation of weakening the dollar abroad and pushing up inflation at home" said Guan Tao, head of SAFE's international payments department, in comments that were subsequently removed from the website on which they appeared.

By Ben Traynor
BullionVault.com

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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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