Gold Price Firm as Greek Default Looms

GOLD PRICE NEWS – The gold price, at $1,529 per ounce, hovered near unchanged Friday morning.  Gold prices have traded in a tight $20 range all week while volatility in global financial markets has risen.  Since touching its record high of $1,577 per ounce in early May, the price of gold has been consolidating above $1,500 as investors weigh the short-term impact of the escalating sovereign debt crisis on the yellow metal.

Holly Hendershot, on the Global Precious Metals team at TD Securities, noted, “The precious metals markets seem a little confused with what a potential  Greek default might mean for them – contagion fears and risk aversion may well drive investors back to the USD, though safe haven status should surely attract the gold bugs. It seems owning Gold against EUR/AUD/CAD might be the better play here.”

The euro, after sinking all week on fears of a Greek default, moved higher this morning after German Chancellor Angela Merkel assured markets that Germany was committed to European integration and to the euro.  The U.S. Dollar index (DXY) fell 0.28 to 75.15 as the euro rose to 1.428 against the greenback.

On Thursday, the gold price remained range-bound between $1,515 and $1,535 for the fourth straight trading session.  The spot price of gold finished with a modest loss of $3.45, or 0.2%, at $1,527.55 per ounce while the euro currency rose 0.2% to 1.4215 against the U.S. dollar.  Silver posted a more substantial decline than the gold price, falling $0.39, or 1.1%, to $35.43 per ounce.

The declines in the price of gold and silver pressured precious metals equities, evidenced by the steep 2.1% drop in the Philadelphia Gold & Silver Index (XAU).  The XAU fell to its lowest level since September 15, 2010 and extended its year-to-date loss to 16.4%.  Barrick Gold (ABX), Goldcorp (GG), and Newmont Mining (NEM) – the world’s three largest gold companies – retreated 1.9%, 3.2%, and 1.2%, respectively.  Among silver shares, Coeur d’Alene Mines (CDE) and Silver Wheaton (SLW) dropped 1.1% and 2.5%, respectively.  Gold mining stocks moved marginally higher early Friday morning.

The Greek sovereign debt crisis and euro zone officials’ response to the challenges continue to dominate the headlines.  While financial markets in the U.S. were relatively stable, the situation was far worse across the Atlantic.  The yield on Greek 2-year notes surged above 30%, a new record high on Thursday.  Ironically, this occurred at the same time that the U.S. two-year yield fell to a new all-time low of 0.30% – a strong indication of the credit quality differences between the two countries.  In addition, credit default swaps on Greek debt climbed to another record high, and now imply approximately an 80% chance of default.

Commenting on the turmoil in Greece, Jonathan Loynes – chief European economist at Capital Economics in London – wrote in a note to clients that “While an additional bailout package may stave off near-term disaster, a major debt restructuring seems inevitable at some point and Greece’s future in the currency union is looking ever more doubtful.”

David Rosenberg, chief strategist and economist at Gluskin Sheff, provided a similar viewpoint.  “The EU has failed to contain the Greek debt crisis, and as history suggests, a domino effect then takes hold.”  Rosenberg, also a long-time bull on the gold price, recently reiterated his positive outlook on the price of gold.  He forecasted that the sovereign debt issues across Europe will lead to further declining faith in fiat currencies, as investors seek out hard assets that are not vulnerable to the reckless policies of central banks and federal governments.

As for the U.S., Rosenberg was not much more positive.  Earlier this week he suggested there is a 99% chance of another recession by 2012, based on a variety of deflationary factors.  “When you have a manufacturing inventory cycle recession, they are usually separated 5 years apart. But when you have a balance sheet recession, credit contraction, asset deflation (for example residential real estate), the downturn tends to be separated every 2 to 2.5 years,” Rosenberg stated in a Bloomberg interview.

In response, he predicted that further monetary stimulus is likely once the Federal Reserve and Chairman Bernanke see “the white eyes of the economy.”  In such a scenario, the gold price is likely to remain a prime beneficiary.