Gold "Rollercoaster" Heads Yet Lower as Greece Hits "Crunch Time for Bankruptcy"

By: Ben_Traynor

SPOT MARKET gold prices fell further Monday morning in London, reaching $1713 an ounce by lunchtime – a 2.8% drop from last week's high – as stock and commodity markets also ticked lower, while US Treasury bond prices gained.

Silver prices dropped to $33.09 per ounce – 3.9% down on the high from last week – as uncertainty grew over the long-running Greek debt issue.

Gold prices began their downward move on Friday following the publication of better-than-expected US nonfarm jobs data. Stock markets by contrast rallied immediately following the release.

"[The fall] may serve as a warning of an interim top," reckons Russell Browne, technical analyst at bullion bank Scotia Mocatta, adding "there is key support at the $1550 level from the long-term uptrend."

On the currency markets, the Euro drifted lower Monday morning against the Dollar, which saw gains against a basket of major currencies.

"It's been a bit of a rollercoaster, the relationship between gold and the Euro," reckons Royal Bank of Scotland metals analyst Nikos Kavalis.

"One day it's positive, one day it's negative. But this morning, Dollar strength, or Euro weakness, is clearly affecting gold."

"Gold is not seeing the big declines we saw in November and December," adds Edel Tully, precious metals strategist at UBS.

"Gold has become more of the safe haven asset...although gold is not in the all-out bullish camp yet, investors have been adopting a more friendly approach, but they are not going all bets in on gold—yet."

Greece's prime minister Lucas Papademos has said that Greek political leaders have agreed on measures to reduce public spending by the equivalent of 1.5% of GDP.

However, there is still no formal agreement to the terms set by the so-called 'troika' of international creditors – the European Central Bank, the European Union and the International Monetary Fund – as part of Greece's €130 billion second bailout.

"If Greece substantially deviates from the reform course through its own fault, then Athens can no longer expect that others will show solidarity in the form of financial contributions," Jean-Claude Juncker, chairman of the Eurogroup of single currency finance ministers, said in an interview with German newspaper Der Spiegel over the weekend.

"If we were to conclude that everything is going wrong in Greece, then there won't be any new aid program, which would mean that Greece will have to declare bankruptcy in March."

Greece has over €14 billion of maturing bond to pay on March 20.

"It will be very bad if there is no white smoke from Athens today," one Eurozone government source tells newswire Reuters.

"We have already missed deadlines...we need a decision now to put the mechanism of rescheduling in place."

"This week is crunch time for Greece," agrees Witold Bahrke, senior strategist at PFA pension in Copenhagen, which oversees $45 billion in assets.

"We can no longer completely exclude extreme scenarios such as a disorderly default or, a bit further down the line, an exit from the Euro area."

Greece is also continuing negotiations with private sector creditors to determine by how much the Greek debt they hold will be written down.

In his Der Spiegel interview, Juncker denied that Portugal will receive the same treatment as Greece.

"There will be no debt haircut for Portugal," he said. "We have always said that Greece was a special case. There, it was necessary to have a certain participation of the private sector. But, that is definitely out of the question for other countries."

Elsewhere in Europe, the European Banking Authority, which oversees regulation of the continent's banking sector, is unconvinced by banks' proposed efforts to boost the amount of capital they hold as a buffer against financial market shocks, the Financial Times reports.

The EBA said in December that 30 European banks needed to boost their capital if they are to reach the regulator's 9% target for the ratio of Tier 1 core capital to assets. Those banks submitted their plans to the EBA last month.

"According to one person close to the process, as much as half of the measures outlined in those plans do not look credible," the FT reports.

Banks will be able to borrow more money when the ECB holds its second 3-year longer term refinancing operation later this month. December's LTRO saw European banks borrow nearly €500 billion in total. Many observers expect banks to borrow at least twice as much as this month's operation.

The difference between bullish and bearish gold futures and options contracts held by traders on New York's Comex – the so-called speculative net long – rose for the fourth week running in the week ended last Tuesday gaining 21%, according to the latest data from the Commodity Futures Trading Commission.

"This has been the most aggressive display of confidence in gold we’ve seen in some time," says Marc Ground, commodities strategist at Standard Bank.

"However, given that these moves were largely as a result of the Fed's dovish announcement, and that before these moves the futures market remained cautious of gold's prospects, we still would not be surprised to see a pull-back."

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 2012

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