Gold Falls Against Rising U.S. Dollar on Euro-Zone Debt Deadlock

By: Ben_Traynor

THE U.S. DOLLAR gold price dropped to a low of $1517 per ounce Wednesday morning London time – a 3.8% fall from last month's all-time high – while stock and commodity markets fell and US Treasuries gained after Eurozone finance ministers failed to break the deadlock over Greek debt.

Euro gold prices, in contrast, rose throughout the morning, climbing to a high of €34,185 per kilogram (€1063 per ounce) – some 2.3% below May's record top.

The Sterling gold price also gained, touching £935 per ounce – a 1.7% fall from last week's all-time high.

Silver prices meantime eased off after yesterday's rally, hitting a mid-morning low of $35.03 per ounce – a 9% loss for the month so far – before recovering slightly.

"We expect the 2011 uptrend line [for the gold price] at $1513.89 to be breached," wrote Commerzbank senior technical analyst Axel Rudolph on Tuesday.

"This view is reinforced by seasonality which also points towards a retracement lower taking place."

The gold price should "remain in the $1520s" counters Swiss precious metals group MKS, provided bargain hunting support remains intact.

"However, should the metal break substantially [below] $1515 we could go much lower," MKS warns.

Support for the gold price will be offered by "a sub-par [US] recovery, from a lack of progress on debt limit negotiations, safe haven demand stemming from Greece, and from potentially higher Chinese commodity demand," reckons Tom Pawlicki, precious metals analyst at leading broker-dealer MF Global.

A meeting of Eurozone finance ministers ended Tuesday with "no result", German finance minister Wolfgang Schaeuble told reporters. 

Schaeuble has proposed a bond swap that would see Greece extend maturities on its debt by seven years – a move which European Central Bank president Jean-Claude Trichet has intimated would be a "credit event" – otherwise known as default.

The Eurogroup will meet again next week, when it will "examine various options" said Eurogroup chairman Jean-Claude Juncker.

"There's no plan B, we have to come up with a solution," says Gilles Moec, co-chief European economist at Deutsche Bank.

"The longer-term solution to the Eurozone debt crisis is a single bond market," adds Steve Barrow, London-based currency strategist at Standard Bank.

The single currency union is "not yet ready" for such a step, though it may be in the future, Trichet's likely successor as ECB president, Bank of Italy governor Mario Draghi – who two years ago refused a request by Italy's government to sell the central bank's gold bullion.

Draghi, who was giving evidence to the European Parliament in support of his appointment, also said he shares Trichet's opposition to imposing losses on private sector Greek debt holders, citing the risk of a "chain of contagion" in the financial system.

In Greece itself, meantime, a general strike began on Wednesday, closing offices, ports, banks and public transport across the country. Police were deployed in Athens as hundreds of protesters tried to prevent legislators from entering parliament, where they are due to debate austerity measures.

Greece's budget deficit widened in the first five months of 2011, the country's finance ministry announced Tuesday.

The deficit between January and May registered as €10.28 billion. The interim target – set as part of last year's bailout – was €9.07 billion.

Over in Washington, Federal Reserve chairman Ben Bernanke called on Tuesday for Congress to raise the federal debt ceiling, saying it is the "wrong tool" for forcing cuts in the federal budget.

Failure to do so could "create serious concerns about the safety of Treasury securities among financial market participants."

The Treasury department forecasts that the US will hit the $14.3 trillion limit by August 2, while it projects the federal deficit for 2011 will be $1.65 trillion.

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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