Gold Rises as Portugal Catches Eurozone Debt Plague

By: Ben_Traynor

WHOLESALE MARKET gold bullion prices held steady around $1517 per ounce for the bulk of Wednesday morning London time – 2% up from Friday's close – while stocks and commodities slumped and US Treasury bonds gained after Portugal saw its sovereign debt downgraded to junk.

News of a Chinese interest rate rise, however, saw the gold price dip towards lunchtime. The People's Bank of China announced it will raise its one-year deposit rate from 3.25% to 3.5% – its fifth rate hike since last October. 

Official consumer price inflation was at 5.5% in May, with June's figure due out next week.

"We believe the market will retain its bearish slant while [gold] holds below $1518," say technical analysts at gold bullion bank Scotia Mocatta.

Gold prices should "remain in consolidation mode", adds Swiss precious metals refiner MKS, which predicts physical demand for gold bullion will be "lackluster during the seasonally quiet summer months".

The silver bullion price meantime hovered above $35.50 for most of Tuesday morning – 4.8% up for the week so far.

"Precious metals should benefit from the increased demand for safe-haven assets...as risk aversion remains elevated and Eurozone debt concerns continue to plague markets," says Marc Ground, commodities strategist at Standard Bank.

Ratings agency Moody's downgraded Portugal's long term government bonds on Tuesday by four notches – from Ba2 to Baa1 – putting them into junk territory.

Insistence that private creditors take part in efforts to aid Greece "implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal," a statement from Moody's said.

Not only does this increase the risks faced by current investors, the agency said, but it may also "discourage new private sector lending...and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms."

"[Moody's] utters what many were fearing – that a participation of the private sector will increase risk aversion in the market," says Stefan Kolek, corporate credit strategist at UniCredit.  

"[There is] talk of an Irish downgrade, described as imminent," says one gold bullion dealer here in London.

Moody's is the first of the three major ratings agencies to downgrade Portugal's debt to junk. 

Conversely, it is the only agency that has not declared its position on plans for private creditors to roll over Greek debt – Standard & Poor's and Fitch having both indicated that this would constitute default.

Over in the US, President Obama rejected a proposal on Tuesday to raise the federal debt ceiling for up to eight months. The US Treasury expects to hit the $14.3 trillion borrowing limit on August 2, with Congressional approval required to raise it.

Obama is due to meet Democrat and Republican leaders of Congress on Thursday.
"We need to come together over the next two weeks to reach a deal that reduces the deficit," said Obama on Tuesday.

"I'm happy to discuss these issues...but such discussions will be fruitless," said Republican John Boehner, speaker of the House of Representatives.

"The legislation the president has asked for – which would increase taxes on small businesses and destroy more American jobs – cannot pass the House."

"An increasing focus on US fiscal worries should...lead to safe-haven and diversification bids" for gold bullion, reckons UBS precious metals strategist Edel Tully.

In South Africa meantime workers in the gold mining industry are preparing to go on strike after the National Union of Mineworkers rejected a 4.5% pay rise offer on Tuesday. The NUM is asking for 14%, citing rising living costs such as food and electricity.

"It [is] important to be aware of the economic realities of the gold mining industry," said the Chamber of Mines in response.

"Production has been consistently declining and...the industry is facing high cost pressures such as electricity, wages, fuel, steel and other input costs."

The rising cost of mining gold bullion mean any falls in the gold price would risk some newly discovered deposits going unmined, according to Evy Hambro, managing director of the Blackrock Gold & General investment fund.

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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