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Gold Rises as Moodys, SandP Warn on China, Greece

Release Date: 
Tuesday, July 5, 2011

The price of gold was higher on Tuesday as investors sought safe haven assets on concerns over the outlook for the Chinese economy and plans by French banks to roll over Greek debt. Moody's and Standard and Poor's warned on the situations in China and Greece, respectively. Analysts at Commerzbank and Deutsche Bank also noted long-term support factors for gold prices.

Moody's Investors Service on Tuesday said 8% to 12% of loans extended by Chinese banks could eventually be classed as non-performing, revising its earlier outlook of 5% to 8% of loans. In response to the news, analysts at Commerzbank wrote in a note on Tuesday that this would boost the appeal of traditional safe haven assets such as gold. Media reports of new interest rate increases in China also deflated demand for risk. "Certainly the Chinese stories this morning have helped (gold)," said Credit Suisse analyst Tom Kendall.

Continued uncertainty over the resolution of Greece's sovereign debt crisis also remains a factor helping gold prices, wrote Commerzbank. Ratings agency Standard & Poor's on Monday said a proposal to rollover Greek government debt endorsed by French banks would likely result in a "selective default." A report in the Financial Times on Tuesday said the European Central Bank would continue to accept Greek government bonds as collateral for loans to banks provided at least one ratings agency doesn't deem Greece to be in default.

"We have seen a bit of buying coming back in from some of the institutional names that have been absent for a while, and positioning in gold is a lot less from shorter-term players than it has been," Kendall said.

In a note on the gold market, Deutsche Bank wrote, "We expect a weak U.S. dollar, negative real interest rates and ongoing central bank diversification into gold will sustain a constructive outlook for the sector."

(Sources:  "Gold Climbs Above $1,500 as Risk Aversion Picks Up," CNBC, July 5, 2011; "Gold futures rise above $1,500 an ounce," MarketWatch, July 5, 2011)

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