Gold Flat On Week, Euro Debt "Showdown...Still Bullish For Gold"

By: Ben_Traynor

SPOT MARKET gold prices traded in a tight range around $1542 per ounce Friday morning London time – almost exactly where they started the week – while stocks and commodities fell and US Treasury bonds gained as Eurozone policymakers remained deadlocked over Greece's debt problems.

Silver prices rose to $37.87 – a 4.4% gain on the week – before falling back towards lunchtime in London.

Sterling gold prices, meantime, continued yesterday's climb, setting a record high London Fix price of £945.69.

"We see gold extending medium term to the $1568 area as far as $1531 is held," says one bullion dealer in London. 

Gold Prices will be "supported if the European debt crisis stumbles along without a solid solution," adds Edel Tully, precious metals strategist at UBS in London.

The Gold Price has now risen above $1500 – a new all-time high when first breached in late April – for three weeks running.

Euro Gold Prices meantime were nearing the week's end little changed from May 20, but have been more volatile than Dollar prices. 

Germany must "insist on the participation of the private sector" in any deal to rescue Greece, German finance minister Wolfgang Schaeuble told the Bundestag on Friday.

Schaeuble repeated calls – made in a letter to European Central Bank, International Monetary Fund and Eurozone officials on Monday – for a bond swap that would lengthen the maturities on Greek debt by seven years, and which would represent "a fair distribution of risks between tax payers and private creditors".

The ECB will not support measures "which are not voluntary", ECB president Jean-Claude Trichet told reporters on Thursday, adding that any solution that involved forcing the private sector to take losses would be a "credit event".

Trichet – who also signaled a July rate rise when he used the phrase "strong vigilance" – has said that encouraging voluntary rollovers by private investors would be "appropriate", but on Thursday said the ECB itself does not intend to do this with its own holdings of Greek debt.

Only a voluntary rollover would fall "outside the default definition", warns Bart Oosterveld, head of sovereign risk at ratings agency Moody's.

"[But] it is hard to imagine something that is truly voluntary in the current environment." 

Targeting a specific group of bondholders – namely those holding debt due to mature in a particular time period – then "that could be a de facto retrospective change in the terms of those securities", adds David Riley, head of sovereign ratings at Fitch, another ratings agency.

"If that were the case, we would likely view that as a distressed debt exchange and therefore an event of default."

Eurozone governments hope to reach agreement by the end of this month's EU summit on June 23-24. The IMF has said that unless Greece's solvency can be guaranteed for the next 12 months, it may withhold further payments of its part of last year's €110 billion bailout.

The disagreements over private sector involvement represent "a showdown between Mr. Schaeuble and Mr. Trichet," says Jorg Kramer, chief economist at Commerzbank in Frankfurt.

"A consensus on the shape of any possible package still seems elusive," adds Mark Schofield, global head of interest rate strategy at Citigroup in London.

The net result, says Schofield, is that Eurozone periphery sovereign debt is "virtually impossible to value."

"There is a huge spread of possible return outcomes that appear to depend largely on the outcome of a series of highly political negotiations. This is not a good basis on which to make fair-value judgments."

"The looming threat in European monetary affairs is the financial integrity of the central bank itself," reckons Jim Grant, publisher of long running investment newsletter Grant's Interest Rate Observer.

Grant adds that the ECB is "factually insolvent" as a result both of buying bonds from weaker Eurozone countries and accepting them as collateral against loans.

"It looks like there's really no way out" of the Eurozone debt crisis, says Bruce Ikemizu, Tokyo-based head of commodity trading at Standard Bank.

"That's still bullish for gold."

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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