Gold volume spikes as debt uncertainty rises

In the Lead: “Deal Or…No Deal?”

Greek Prime Minister Papandreou’s earlier wishes for some concrete EU offerings that would help stave off a negative outcome for his country’s debt problems were apparently on their way to becoming true this morning. Greece was given more time to deal with its Mount Olympus-sized pile of debt and the sense of relief about the step that the EU took overnight was felt as far away as the bond markets of Ireland and Spain.

Ratings agencies welcomed the fresh life-preserves package as well, except for Fitch’s, that is. The firm at once said that it believes that the commitments made by EU officials signifies an “important and positive step towards securing financial stability in the euro zone” but that Greece is, in effect, facing a “selective default” as the rescue bag of goodies includes private sector participation.

About €159 billion ($229 billion) in new aid are on offer to Greece, including bondholder contributions and a chip-in by the IMF. The region’s financial institutions will also add some €50 billion to the funds and the ECB will now likely accept Greek collateral in the event of a default due to the fact that guarantees will be offered by eurozone member nations.

While most markets welcomed the financial rescue of Greece, gold market players exhibited “skepticism” about its efficacy and piled on additional bets in the yellow metal as Friday morning’s dealing began. Some economists have expressed doubts about the ability of the rescue plan to succeed if in fact the EFSF (TARP, European-style) is not augmented in size.

The “default = we win, rescue = we win some more” formula was quickly applied to the bids in bullion ahead of the New York market’s opening. Open interest on COMEX was hovering at over half a million contracts – a half-year high. And thus, the battle for the $1,600 mark recommenced ahead of the weekend.

Veteran RBC market analyst George Gero notes that the 10% jump in the level of open interest in gold comes at a time when COMEX options are set to expire on the 27th, China announces PMI statistics on the 1st, and the US debt ceiling is to be hit on the 2nd. While George labels this convergence as a “perfect storm,” he does allow for the possibility that it will be a perfectly volatile storm. The present conditions – in his assessment – present a double-edged sword as latecomers are long at near-record price levels and as protective sell-stops may be planted along the way here.

Spot gold dealings started their New York chapter on Friday with a $7.90 gain and the bid quoted at $1,598.10 per ounce. Silver advanced 56 cents to open at the $39.88 mark per ounce. Platinum also gained, opening at the $1,792.00 per ounce level with a rise of $10.00. Palladium was slightly lower, losing $2.00 to start at the $804.00 per ounce bid level.

Once again, no change was reported in rhodium, still bid at $1,950.00 the troy ounce. There has been a noticeable tightening in physical/allocated rhodium bid/offer spreads; they are now only $100-wide on Kitco’s trading pages, and, at that level, the differential is rather competitive with the average gold coin bid-offer gap. As opined on Bloomberg yesterday, the next 25 to 35 percent gain is likelier to be seen in PGM group metals (esp. palladium and/or rhodium) rather than in the overextended gold and/or silver niche. Consider the fundamentals, for starters.

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