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Europe Delays Greek Aid as Goldman Sees Recession

Release Date: 
Tuesday, October 4, 2011

News out of Europe on the worsening Greek debt situation drove stocks lower as European finance minister Jean-Claude Juncker announced on Monday that the Euro Group would delay its next aid payment to Greece so its inspectors would have enough time to properly complete their work in Athens. Increased fears over a Greek default and European recession weighed down the equity markets with the Dow and S&P 500 indices falling by more than 2 percent. Gold also fell along with other commodities as investors sought liquidity.

European finance ministers considered whether banks should take bigger losses on Greek debt as they delayed payments to Greece until November. "The economy is in a protracted slowdown, and until there's a resolution with Greece, that situation will continue to linger over the market," said Robert Pavlik, chief market strategist at Banyan Partners LLC in New York. "This could turn into a self-fulfilling prophecy of recession."

Concerns over Europe's financial system have contributed to equity losses over the past several months. The S&P 500 stock index has fallen more than 20 percent from an intraday high reached in early May, putting it into a bear market. "There's indiscriminate selling at this point, without any real justification. No one really understands what's going on in Europe, and until we get more clarity I doubt if we'll see much interest in buying," said Eric Green, senior portfolio manager and director of research at Penn Capital Management, which oversees $6.5 billion.

Goldman Sachs said it now forecasts the euro zone will slip into a "mild recession" in the fourth quarter of 2011 and first quarter of 2012. The firm cut its gross domestic product outlook for advanced economies in 2012, lowering its growth forecast to 1.3 percent from 2.1 percent, saying "the main driver of our shift in views has been the escalation of bank funding stress in the Euro area, alongside deeper public budget cuts in a number of European countries."

Goldman Sachs also reiterated its 12-month gold price target of $1,860 an ounce. "As we expect gold prices will continue to be driven in large measure by the evolution of U.S. real interest rates and with our U.S. economic outlook pointing for continued low levels of U.S. real rates in 2012, we continue to recommend long trading positions," it said. Credit Suisse raised its 2012 gold price forecast to $1,850 an ounce, saying the metal would benefit from the uncertainty and dislocations in financial markets and has further upside with the crises set to continue.

Other analysts were also upbeat concerning gold. "The long-term uptrend for gold remains intact and we remain bullish. Gold could climb to about $2,000 an ounce in 2012. Safe haven bids could slowly return as prices stabilize," said Ong YiLing, an analyst at Phillip Futures in Singapore. "After the sell-off in gold earlier, this has reduced some of the speculative positions." 

Simon Denham, CEO of Capital Spreads, said gold’s bounce back "did not end yesterday as investors were seen to still be considering the precious metal a safety haven and buying in to protect themselves from the market limbo caused by a looming Greek default." Moves over the last couple of sessions, which have not been hampered by a strengthening dollar, may indicate "the resumption of a new rally after the recent correction," Denham said.

(Source: "Gold strengthens as Greek fears worsen," MarketWatch, October 4, 2011 "S&P enters bear market, Greece Sinks Wall Street," Reuters, October 4, 2011; "Wall Street set to open in bear market," Reuters, October 4, 2011; "Gold turns lower as wider markets slide," Reuters, October 4, 2011; "PRECIOUS-Gold rises 1 pct on fears of Greek default," Reuters, October 4, 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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