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European Crisis Affecting German Bond Yields

Release Date: 
Thursday, June 14, 2012

Gold prices were steady on Wednesday, essentially unchanged at 7:02 a.m. Pacific Time on the New York Spot market, trading at $1,618.20 per ounce. Spot silver was $0.40 lower at the same time, trading at $28.56 per ounce. (Click here for the most current spot prices.)

The Eurozone debt crisis continued to influence bond yields for sovereign nations, including German bonds that were generally considered among the safest. Moody's cut Spain’s credit rating to one notch above "junk" status. Spanish and Italian bond yields rose on the news, with Spanish 10-year government bond yields reaching 7 percent for the first time.

While it may be too early to conclude that German bunds are losing their safe haven status, UBS said that "such a scenario... would mean investors would be on the lookout for new 'secure' places to park their money. Given the much-reduced list of alternatives, gold would be one of the top options."

Germany's insurance costs on its bonds are increasing, indicating more uncertainty about the nation's strength, said Commerzbank in a research note. "If German government bonds were to lose their status as a safe haven in the foreseeable future, this could prompt some investors to switch to gold," Commerzbank said. "The increased gold demand that this would trigger should then drive prices up."

"German bund yields have... been rising, behaving more like periphery bonds rather than a safe haven. The spread versus UK gilts [treasury bonds] - another European sovereign bond that has been considered safer than the periphery - has narrowed substantially this week," UBS said.

Slower inflation numbers in the U.S. released today raised expectations the Fed may announce a new round of quantitative easing at its meeting on June 19-20. "Gold prices have tended to rally this year when expectations of easier monetary policies increased," said James Steel, precious-metals analyst with HSBC, in a note.

The price of gold may reach $2,000 a troy ounce within the next two years, the chief global commodity strategist at J.P. Morgan said Thursday.

(Source: "Gold price may reach $2,000 in 2 years: JP Morgan," MarketWatch, June 14, 2012;  "PRECIOUS METALS: Gold Retreats on Comments from ECB Official," Wall Street Journal, June 14, 2012; "PRECIOUS-Gold climbs above $1,620/oz as euro holds ground," Reuters, June 14, 2012)

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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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