Gold Prices Climb on Greek Deal

Posted on: February 21, 2012

Gold prices are trading decisively higher Tuesday as the euro strengthened against the dollar after European finance ministers agreed to provide an additional 130 billion euro bailout for Greece. The deal will cut Athens’ debt to 120.5 percent of gross domestic product by 2020 and allows Greece to avert a chaotic default when a major bond repayment comes due in March. The agreement also requires private bondholders to take greater losses and Athens to implement stricter austerity measures.

“We have reached a far-reaching agreement on Greece’s new program and private sector involvement that would lead to a significant debt reduction for Greece … to secure Greece’s future in the euro area,” Jean-Claude Juncker, who chairs the Eurogroup of finance ministers, said in a news conference.

According to Reuters, Greece will be required to deposit funds to service its debt in a special account to guarantee repayments. The country will also be placed under permanent surveillance through an increased European presence in Athens.

Analysts said while the deal provides time for the Eurozone to put new crisis measures in place over the coming months, it leaves deep doubts about Greece’s ability to recover and avoid default in the longer term. Experts argue that Athens will need more help to bring its debts down to the level envisaged in the bailout, and the cuts in spending also mean Greece could struggle for years without economic growth. Regardless, the deal is widely viewed as a step in the right direction as it alleviates the immediate risks posed to the Eurozone by a default in Greece. “It’s an important result that removes immediate risks of contagion,” Italian Prime Minister Mario Monti told a news conference.

The euro will likely outperform the U.S. dollar over the next six months, according to HSBC’s global chief economist, Stephen King. Speaking to CNBC, King said the probability of additional quantitative easing in the U.S. versus efforts to reduce budget deficits in Europe means the euro will come out stronger in the medium term. Citing Washington’s failure to deal with the U.S. budget deficit, King said the chance of another round of asset purchases is “probably greater in the U.S. than in Europe and therefore I think the dollar is more likely to weaken over the next few months.”

Bloomberg reports that gold traders are increasingly bullish following comments from hedge-fund manager John Paulson that investors should buy the metal to protect against inflation caused by government spending. “By the time inflation becomes evident, gold will probably have moved, which implies that now is the time to build a position in gold,” Paulson said in a letter to investors.

Echoing Paulson’s comments, Mark O’Byrne, executive director of Dublin- based GoldCore Ltd., also urged investors to acquire gold for long-term wealth preservation. “The appalling state of fiscal finances of most industrial nations does lead to concerns about the possibility of inflation,” O’Byrne told Bloomberg. “Gold is a crucial diversification given the various risks out there.”