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Analysts See Support for Gold on Euro Debt Fears

Release Date: 
Tuesday, September 13, 2011

Increased worries about the sovereign debt crisis in Europe are supporting demand for gold as a safe haven asset. The threat of a potential Greek default and related banking crisis in Europe led European stocks to slide to a two-year low. The euro fell sharply against other currencies before news that Italy's request that China buy its debt calmed fears in the euro zone.

Greece's risk of default in the next five years has soared to 98 percent, based on a standard pricing model of credit-default swaps. The Greek Prime Minister is failing to reassure international investors that his country can survive the debt crisis.

Investors are watching a meeting between the U.S. Treasury Secretary Timothy Geithner and euro zone finance ministers on Friday to discuss risks posed by European debt contagion. "There is a slow-motion train wreck going on in Europe at the moment, which is going to be relatively supportive of gold," said Nick Trevethan, senior commodities strategist at ANZ. "All the factors that have been supporting gold for the past few months are still there. Nothing has changed."

Morgan Stanley discussed its positive outlook for gold in a new report, citing gold as a hedge against several macro challenges including financial systemic risk, concern of a double dip recession and sustained low interest rates. "We would expect a meaningful challenge to the previous inflation adjusted all-time high gold price" on increased risks from the contagion effects of the debt crisis in Europe, continued uncertainty over U.S. debt and the likelihood of extended low rates in response to weakness in the U.S. economy, Morgan Stanley analysts wrote.

"As the source of downside risk to growth is the result of policy error in relation to the handling of sovereign debt in which the outcome is likely to be an extended period of negative real interest rates in the developed world, the forecast risk in gold is skewed firmly to upside," the analysts said.

"The debt crisis of euro-zone peripherals remains the dominant issue," Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt, wrote in a report. "Gold should remain in demand as a safe haven."

(Sources: "PRECIOUS-Gold rebounds 1 pct on persistent euro zone worries," Reuters, September 13, 2011; "Gold's ‘Perfect Storm' to Continue on Haven Demand, Morgan Stanley Says," Bloomberg, September 13, 2011; "Gold Climbs as European Debt-Crisis Concern Spurs Demand From Investors," Bloomberg, September 12, 2011)

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