Gold Falls Along With Stocks As Euro Faces First Debt Default

By: Ben_Traynor

SPOT MARKET prices for gold bullion continued to fall Wednesday morning, dropping to $1533 per ounce – a 0.6% loss on the week – while stocks and commodities also fell and US Treasuries rose following Tuesday's speech by Federal Reserve chairman Ben Bernanke.

Silver prices also fell, falling to $36.17 per ounce – a few cents below where they started the week – as the single Euro currency touched new one-month highs near $1.47 despite fresh political wrangling over the latest Greek deficit crisis.

"[Gold] will fizzle out ahead of the all-time high at $1577.60," reckons Axel Rudolph, senior technical analyst at Commerzbank.

"The gold price [should then] retest the 2011 uptrend line at $1503.27 within a few weeks."

"We see risk of another move higher," counter technical analysts at bullion bank Scotia Mocatta, who see a "measured move" to $1599 should gold break through last month's all-time high.

"[Gold] continues to be boosted by pockets of investment demand as investors diversify their portfolios," says Swiss precious metals firm MKS, but risk appetite will be "mixed in the short term.

"The precious complex is set to remain volatile [with] bouts of liquidation" if stock-market prices continue to fall, MKS says.

Speaking on Tuesday to the American Bankers Association, "The economy is still producing at levels well below its potential," US Federal Reserve chairman Ben Bernanke said, describing the recovery as "frustratingly slow".

"Consequently, accommodative monetary policies are still needed."

Bernanke's implication was that "a third round of quantitative easing (QE) is not likely to come," reckons Sung Won Sohn, economics professor at California State University. "There's no need to change at this point."

But while Bernanke did not mention additional monetary stimulus, he did warn of the dangers of aggressive fiscal tightening, calling it "self-defeating" if Washington caps its spending and raises taxes "in the very near term."

"We doubt that global government borrowing will decline soon. We therefore believe that global liquidity will grind higher – and so will the gold price," says Standard Bank commodity strategist Walter de Wet.

"A refusal to expand the balance sheet further [with QE3] shouldn't end gold's push higher." 

Meantime in the 17-nation Eurozone, "Any additional financial support for Greece has to involve a fair burden sharing between taxpayers and private investors," writes German finance minister Wolfgang Schauble in a letter – dated Monday and leaked to the press on Wednesday – sent to officials at the International Monetary Fund, European Central Bank and Eurozone ministers.

"Imposing haircuts on private investors can seriously disrupt the financial and real economy of both the debtor and creditor countries," countered ECB executive board member Lorenzo Bini Smaghi on Monday, in a speech given in Berlin.

"It ultimately damages the taxpayers of both the creditor and debtor country... such restructuring should only be the last resort."

Schauble's letter also states that the Eurozone project – launched in 1999 – now faces a "real risk" of its first default.

Earlier this week ECB president Jean-Claude Trichet said that encouraging private investors to roll over maturing Greek debt would be considered "appropriate".

But "If the rollover has a coercive element to it, does that itself constitute an element of default?" asks a gold bullion dealer here in London.

"We find it worrying that some rating agencies believe a debt rollover in Greece could count as a default [as] the ECB says it won't accept defaulted Greek bonds as collateral," adds Standard Bank currency strategist Steve Barrow.

By Ben Traynor
BullionVault.com

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

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