Gold Leaps as Finnish Demand Puts Entire Greek Rescue at Stake

By: Ben_Traynor

THE DOLLAR gold bullion price leapt 2.2% in less than an hour Tuesday lunchtime London time, hitting $1832 per ounce – still 4.2% off last week's all-time high – while commodities fell, US Treasury bonds rose and stocks were mixed as Greek debt worries affected the Eurozone.

"Conventional wisdom is that bullish sentiment on equities would mean bearish sentiment on gold," reckons one gold bullion dealer here in London.

"But the outlook remains sufficiently uncertain that gold continues to find reasonable support."

"There's a little bit of bargain hunting," adds Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong.

"Towards September, jewelers pick up...festivals give gold a little bit of support for the time being. The premiums are increasing due to some demand. There's not much sales of scrap around."

Silver prices rose to $41.48 per ounce – just above Friday's close.

"We see last week's low of $38.78 as an important technical pivot," say technical analysts at bullion bank Scotia Mocatta.

"Topside resistance is seen at $41.71. We are cautious owning silver as we do not believe the market has recovered from the April/May large liquidation."

Stock markets rose on Tuesday in London – which reopened after yesterday's bank holiday – with the FTSE 100 up over 2% by lunchtime, following gains for US and Asian stock markets over the previous 24 hours.

In continental Europe, by contrast, major stock markets sold off, with Germany's DAX down nearly 1%, while in Paris the CAC fell 0.4%

Some European banks are not taking sufficient writedowns on the Greek debt they hold, according to the International Accounting Standards Board, which oversees markets on behalf of the European Union.

"It is hard to imagine that there are buyers willing to buy those bonds at the prices indicated by the valuation models being used," warned IASB Hans Hoogervorst in a letter dated August 4 and published Tuesday.

The letter's publication follows calls for an "urgent recapitalization" of Europe's banking sector, made on Saturday by International Monetary Fund managing director Christine Lagarde.

"Monetary policy also should remain highly accommodative, as the risk of recession outweighs the risk of inflation...policymakers should stand ready, as needed, to dive back into unconventional waters."

Brussels dismissed the idea on Monday.

"We've always preferred the private sector to come up with solutions by themselves," said EU spokesman Amadeu Altafaj-Tardio.

"European banks are much better capitalized than they were even a year ago...[but] national public authorities have also drawn up contingency mechanisms in case."

Elsewhere in Europe, Finland continues to insist on receiving some form of collateral in return for contributing to a Greek bailout. 

Greece agreed earlier this month to post cash as collateral against the Finnish portion of the rescue deal – a proposal with which other Eurozone members are unhappy. 

"In normal circumstances, demanding collateral is quite usual," Germany's deputy foreign minister Werner Hoyer says in an interview published Tuesday by Finnish newspaper Helsingin Sanomat.

"But now Greece has put the ball back in Finland's court by saying that Finland will get the cash collateral from the other Euro countries...that will naturally not do."

"I'm not happy with [the Finland-Greece deal]", said Jean Claude Juncker, chairman of the Eurozone finance ministers, on Monday.

Finland's government would, however, "likely collapse" if it backed down on its collateral demand, according to Timo Tyrvaeinen, chief economist at Finnish bank Aktia.

“What's at stake is...the entire second rescue package for Greece by the Euro area," reckons Frank Engels, Frankfurt-based co-head of European economy at Barclays Capital.

On the gold futures markets meantime the number of noncommercial – so-called speculative – long positions held by traders on New York's Comex fell 3.4% in the week ended 23 August.

"The fall off in gold speculative longs points to a market that whilst not overly bearish (no strong surge in speculative shorts) is questioning further upside for gold," says Marc Ground, commodities strategist at Standard Bank.

"Speculative shorts remain above last year's average. Further price dips in the near term can be expected, should the market's perception of risk start to change."

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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