Gold Thrives Amid International Debt Uncertainty

Brittney Barrett  |

Last week investors were relieved to hear that Greece had accepted the French aid designed to allay the imminent threat of a debt default. In the aftermath, the dollar went higher against the euro and currencies were reigning. Gold, which has bulls and bear split on its bubble status, took a back seat for the moment. Perhaps realizing that the impact of the French aid would be short-lived though, the metal has made a triumphant return in trading this week, reaching close to its highest levels in recent trading. Its appeal as a safe-haven amid European debt woes is being compounded by Portugal’s recent credit downgrade by the S&P.  Also contributing to the gold rush is the local-government-debt in China.

Gold for August delivery rose over $20 or 1.3 percent on the Comex division of the New York Mercantile Exchange, to its highest levels since June 22. On Tuesday, precious metals jumped over $30 an ounce in trading, indicating a rally that will continue alongside the European and U.S. debt problems and fear that China will turn inward to contend with their own debt difficulties, having a detrimental effect on investor sentiment in Europe and the U.S.

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Credibility from Europe to the U.S. has been waning for months alongside mounting, potentially overwhelming debt, but the most recent news from China, a nation controlling so much U.S. debt, is tipping the scales in favor of metals right now.  The declining confidence has led organizations to seeming panic downgrades, like Moody’s Investors Services downgrading Portugal’s credit rating by four notches to speculative grade. Meanwhile, on Monday, when the American investors were cooling their heels for the holiday, the Standard & Poor’s credit-rating firm indicated that the plan to roll over Greek-government debt would constitute a selective default, confusing investors on the true status of the recovery.

Decisions like these serve as indicators to the investor that there is instability. The presence of instability prompts investors to look to metal as a armor for their portfolio should the market continue to slide.

Among the worries of the global economy right now is China’s continual rate hikes. The nation’s effort to slow the growth of their economy in order to minimize inflation has cause international anxiety. The slow down of China, which edged in earlier in the year to become the second largest economy world-wide would be traumatic for the success of other, Western nations, utilities, technology companies and raw material companies. This is why the People’s Bank of China decision to raise lending and deposit rates 0.25 percent of a point on Wednesday continued to prompt movement into gold. Should China’s growth continue to curb significantly as a result of that adjustment, the third of its kind this year, then gold would continue to climb.

Still though, the worries over China remain secondary to the domestic and European debt concerns. The strength of gold appears to be indicative of the attitudes regarding where both the U.S. and Europe are in terms of those troubles. Gold is seasonally weak so the fact that it is has already been pushing up in July shows there is a cause for concern. While there is still room for gold prices to fall in August and September as they typically do, the trajectory appears to be bucking the normal as the threat of debt ceilings and inabilities to make returns threatens nations on either side of the Atlantic.

Aside from Gold and Silver, most other metals decline in trading today with both copper (HG1U) and palladium, (PA1U) down for September. Platinum (PL1V) also fell while silver (SI1U), which has also had investors divided climbed modestly.




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