Gold following weaker euro as Greece concerns mount

Gold futures rebounded strongly last Thursday and Friday, rising 0.5% for the week after falling 5% the previous two weeks. Gold touched $1,599 Monday morning in Asia though some profit-taking took place. It fell by 1% on Monday and Tuesday as the Dollar Index rebounded 0.25% while Euro lost 0.75%. The S&P 500 rose almost 1% upon better April U.S. home sales data on Tuesday but gave up all of its gains by the end of the day when news of Greece exiting the Eurozone resurfaced while the Facebook stock continued to tumble. The weak sentiment also affected gold pushing the metal down to a low of $1,555 this Wednesday morning.

While the G8 leaders called for Greece to stay in the Eurozone, many economists and fund managers are expecting Greece to abandon the Euro currency. Dow Jones Newswire reported the former Greek President Papademos saying that the risk of Greece exiting the euro cannot be ruled out and the consequences could be more severe than anticipated. An inflationary spiral from a large depreciation could wipe out the benefits of exit. After the U.S. market has closed, Papademos spoke to CNBC and clarified that he was not aware that Greece or any institutions or countries in Europe were specially preparing for Greece's euro exit. Speculations on Greece have increased before the EU Summit that will take place on Wednesday night. Fear of the contagion on other European countries resulting from Greece's euro exit has prompted investors to sell risky assets and the euro which leads to the U.S. dollar rising and gold price falling.

An economist from CICC, a Chinese Investment Bank, said that Chinese GDP growth could slow to 6.4% should Greece exit the euro. Just last Sunday night, Chinese Premier Wen said that China should give more priority to maintain economic growth as recent data has shown China's growth has slowed more than expected.

Gold volume recently traded in the Shanghai Gold Exchange was above the monthly average according to Barclays. However, the chairman of the All India Gems and Jewelry Trade Federation said that India gold jewelry sales could fall 30%-40% in Q2 and decline 30% in 2012. The good news is that physically-backed ETPs level was still up 49 tonnes year-to-date to on May 17 according to Barclays, a mere 1% below its recent peak.

About the Author
Austin Kiddle

Austin Kiddle is a director of the London-based gold broker Sharps Pixley Ltd.

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