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Decision on Funds to Greece Delayed

Release Date: 
Wednesday, June 22, 2011

Gold prices have been affected recently by continued uncertainty on a European bailout for Greece, with the decision on whether to grant the country its next tranche in aid deferred until July. Lack of a direction on whether the U.S. would continue its easy monetary policy has also affected the gold market. In this environment, gold prices have benefited from the metal’s traditional role as a safe haven asset.

Finance ministers in the euro zone said Greece would first have to introduce harsh austerity measures before potentially receiving the next scheduled tranche of aid totaling 12 billion euros ($17 billion). The ministers also agreed they would seek a voluntary rollover of Greek debt by private bondholders to finance a substantial part of Greek funding needs in coming years.

"I think to some extent it was expected they won't be able to finalize [a debt resolution] so soon because it was a pre-condition that Athens has to introduce all of these austerity measures and show a plan of that sustainability before they get their bailout," said Ong Yi Ling, investment analyst at Phillip Futures.

"Uncertainty is keeping gold well supported at the moment," Darren Heathcote, head of trading at Investec Bank (Australia) Ltd., said by phone. “The market’s waiting with bated breath to see what comes out of the European discussions on Greece."

"There's no decision out of Europe so we don't quite know what to do," Ira Epstein, director of the Ira Epstein division of the Linn Group. "Gold is acting as a safe haven against what's happening in a major banking economy in the world—the euro zone."

Financial markets are bracing for the end of the Fed's quantitative easing (QE2) program in June. The easy money policy is credited with boosting stocks but blamed for higher commodities prices and a weak dollar.

"Investors will be trying to see how far or how high the bar for the next round of quantitative easing will be. If this bar is actually lowered, then I think it will be beneficial for gold," said Ong Yi Ling at Phillip Futures. "If it is high, then I think gold will still remain in its current range bounds that we are seeing.  I don't think they will do QE3 now," Ong said, referring to extending its monetary stimulus program.

In Asia, physical gold demand has been strong, said Walter de Wet, head of commodity strategy at Standard Bank. "This segment of the gold market has been buying gold in dips for the past few weeks, and this trend seems entrenched," de Wet said in a note to clients. "We have seen exceptionally strong physical gold demand so far this year."

(Sources:  "Gold Inches Up on Greece Debt Concerns," Wall Street Journal, June 20, 2011; "Gold May Advance as Greek Debt Crisis Increases Haven Demand; Silver Drops," Bloomberg, June 20, 2011; "PRECIOUS-Gold gives up gains, euro zone crisis lingers," Reuters, June 20, 2011)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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