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Rejection of ECB Bailout for Greece Supports Gold

Release Date: 
Friday, June 10, 2011

European Central Bank (ECB) President Jean-Claude Trichet rejected any direct ECB participation in a second bailout for Greece, adding to uncertainty in the euro zone as government officials must now seek debt solutions involving investors. The news pushed the euro lower as the U.S. dollar rose against a basket of currencies. The debt situation in Greece and other factors are underpinning prices for gold, according to analysts at Standard Bank, Saxo Bank, UBS, Standard Bank and Barclays Capital.

"It looks like there's really no way out," said Bruce Ikemizu, head of commodity trading at Standard Bank Plc, commenting on the Greek government's debt situation. "That's still bullish for gold."

The European Central Bank signaled a July interest rate increase as was widely expected, even as higher rates may intensify the debt crisis that's threatening Greece with default on its obligations. "A weaker euro driven by the uncertainty is Europe tends not to hurt gold," said Ole Hansen, senior manager at Saxo Bank. "Gold is staying where it is, because it gets support from that uncertainty." According to Hansen, "It just adds to the sense that investors are not willing to let go of their gold for the moment." He noted, "we bounced very strongly from the correction in May, and that has increased confidence that gold is heading higher eventually."

UBS raised its three-month forecast for gold prices to $1,600 per ounce from $1,400. Gold will be "supported if the European debt crisis stumbles along without a solid solution," said London-based analyst Edel Tully in a report. "Weakness in global data is fostering more optimism on gold in the second half. There's the threat that real interest rates might remain entrenched in negative territory across many regions."

Separately, South Africa is in the midst of wage talks in mining and related industries, and the labor union has demanded hefty wage increases. "Potential supply disruption risks continue to lurk in the background given previous negotiations across the industry have rarely been free of industrial action," said Barclays Capital in a research note.

(Sources: "PRECIOUS-Gold ticks down on dollar; debt worries support," Reuters, June 10, 2011; "Gold Holds Above $1,540 as Debt Crisis Simmers,"CNBC, June 10, 2011; "Gold May Advance on Concern About Europe's Debt Crisis, Weakening Growth,"Bloomberg, June 10, 2011; "Gold Set for Fourth Weekly Advance on Europe Debt Crisis, Growth Concerns," Bloomberg, June 10)

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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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