Gold Rises on Continuing Greece Default Threat Despite Greece Bailout Agreement

By: Ben_Traynor

U.S. DOLLAR gold bullion prices spiked to $1747 an ounce Tuesday lunchtime in London – a 1.3% gain on last week's close – as US Markets re-opened to the news that European finance leaders have agreed to bail out Greece.

Silver bullion also spiked, hitting $33.97 per ounce – 1.9% up on the start of the week.

European stock markets by contrast drifted lower in Tuesday morning trading, while the Euro gave back most of the gains it made against the Dollar immediately after the Greek deal was announced. Commodities edged higher, while US Treasuries fell.

"Market reaction [to the Greek deal] has been remarkably muted so far," one London gold bullion dealer noted this morning, before US markets opened.

Greece's €130 billion second bailout was finally approved in the early hours of Tuesday morning, following a day of discussions among Eurozone finance ministers in Brussels. 

The European Central Bank will pass on profits from its Greek debt holdings – bought below face value as part of its Securities Markets Programme aimed at supporting troubled sovereign debt markets – to the Greek government as a means of alleviating Greece's debt burden.

Private sector creditors meantime will be asked to take bigger losses on their Greek debt holdings than previously agreed. 

"From my point of view, this is a solid deal for investors, a fair deal for all parties involved," said Charles Dallara, managing director of the Institute of International Finance, which negotiated with the Greek government on behalf of private bondholders.

"We've been able to avoid a disorderly default."

Private sector losses will be equivalent to "more than 70%" of the net present value of the bonds, according to Jean Lemiere of BNP Paribas, who was involved in the negotiations.

The bailout means Greece should now be able to pay €14.5 billion of bonds that mature on March 20.

"Does this alleviate the risk of imminent default?" asks Callum Henderson, Singapore-based global head of foreign-exchange research at Standard Chartered.

"Yes, but not further out. Further out, the concerns of a default will keep coming back."

"The risk," adds a Hong Kong gold bullion dealer, "that we are going to have a sovereign default which leads to the collapse of the Euro still exists, but for that to happen in March, that risk is gone."

The official statement released last night by Eurozone finance ministers calls for "further major efforts by the Greek society...to return the economy to a sustainable growth path", as part of an effort to reduce the country's debt-to-GDP ratio to 120.5% by 2020.

The statement also invites the European Commission "to significantly strengthen its Task Force for Greece...in order to bolster its capacity to provide and coordinate technical assistance".

"Greece will find it difficult to shoulder even the reduced debt in the long-run if it does not implement far- reaching reforms," says Commerzbank chief economist Joerg Kraemer.

"The probability will rise in the second half of the year that a frustrated EU stops payments to Greece."

Gold imports to India meantime could fall in 2012 for the first time in three years, according to analysts polled by newswire Bloomberg. 

India imported 969 tonnes of gold bullion in 2011, according to World Gold Council data, in a year that saw gold ETF demand double. The median estimate in Bloomberg's poll was for 900 tonnes to be imported this year.

Silver bullion imports however could breach 5000 tonnes – up from 4800 tonnes last year – according to Bombay Bullion Association president Prithviraj Kothari.

"Silver demand is expected to rise on firm industrial and investment demand,"  Kothari told reporters at a conference on Tuesday.

Here in London, the daily average volume of gold bullion transferred between parties by clearing members of the London Bullion Market Association was 690.5 tonnes in January – a 1.0% gain on the previous month, and a 15.3% year-on-year gain – LBMA clearing statistics published Monday show.

By contrast, the daily average volume of silver bullion transferred fell last month, dropping to 4641 tonnes – the lowest level since March last year. The daily average silver volume fell 24.3% from December – though year-on-year it posted a gain of 24.6%.

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 2012

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