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Gold Hits "Forex Volatility" as Greece, Ireland Threaten Bondholders, Prices to Buy Gold Hit Fresh Euro & GBP Highs

Gold eased back again vs. the rising US Dollar on Thurday morning but the price to Buy Gold for both Euro and UK investors flirted with new all-time highs as Europe's debt crisis worsened.

Silver Prices were little moved as broader commodity markets fell hard.
 
The cost to bondholders of insuring Greek, Irish and Portuguese debt against government default all leapt to new record highs, with credit-default swaps now implying a 75% chance of a "credit event" in Athens according to one analyst.

Global stock markets extended this week's sharp losses, taking the FTSE100 here in London down to a two-month low, dropping 5.7% from the start of June.

"If you fall through the ice you better have a very large safety net," said Dutch central banker and ECB policymaker Nout Wellink today, warning that a Greek default would force the European Union to double its €750 billion bail-out fund.

"The Vienna initiative [for Greek debt restructing] looks to me entirely voluntary" for bondholders, said Italian policy-maker Mario Draghi on Wednesday.

Apparently now approved by the European Parliament as the next president of the European Central Bank when current boss Jean-Claude Trichet steps down in November, "I haven't understood whether [the other option, debt exchange] is voluntary or it could end up being involuntary," Draghi told the MEPs at Wednesday's appointment hearing.

Over in Dublin meantime, Ireland's deputy prime minister Eamon Gilmore today repeated finance minister Michael Noonan's controversial view that Dublin now expects bondholders in its failed banks to suffer losses, saying that "taxpayer losses must be minimized."

"We would have expected something of a rally in Gold Prices" on this news, says the latest weekly commodities analysis from French bank Natixis, disappointed with gold still trading down from last week against the Dollar.

"The yellow metal [is] mostly forex-driven for the moment," says Swiss refinery group MKS, "trading with substantial volatility."

"It's a toss-up between people fleeing from equities and putting their money into gold and people fleeing from gold because of the Dollar rally," said one market analyst to the Wall Street Journal.

Base metals and agricultural commodities also sank on Thursday, but crude oil ticked higher above $115 per barrel in Europe.

US Treasury bonds rose once more – driving two-year yields down to a new 2011 low – as the Euro dropped to a 3-week low to the Dollar at $1.41.

Two-year Greek bond yields broke above 30% as prices fell yet again.

"This looks like a gold supportive enviroment from a macro basis," says a note from Japanese metals conglomerate Mitsui, "[but] Euro weakness may pressure gold intraday.

"Silver looks capped up to $36.20" per ounce.

Uncertainty over US monetary policy after QEII ends on June 30th "presents a hurdle for gold in the short term," reckons UBS strategist Edel Tully, quoted by Dow Jones, "and is one of the key reasons why we think the yellow metal will be under pressure during the summer."

Here in the UK, in contrast – and "with the freedom granted from having our own currency – the [current] mix of tight fiscal and loose monetary policy is necessary for a rebalancing of the economy," declared Bank of England governor Mervyn King in his annual Mansion House speech to the City of London on Wednesday night.

"There can always be differences of judgement...but to change the broad policy mix would make little sense."

Prices to Buy Gold in Sterling today touched new all-time highs at £951.50 per ounce.

"We are not recommending any new positions today," wrote Standard Bank currency strategist Steve Barrow Thurday morning. "It seems like a time to be defensive with the Yen and Swiss Franc – the currencies most likely to rise – followed by the Dollar."

The Swiss National Bank today voted to keep its key interest rate between zero and 0.75%, warning that "margins in the export industry are coming under increasing pressure" thanks to the rising Franc.

"The current expansionary monetary policy cannot be maintained over the entire forecast horizon without compromising price stability," said SNB chairman Philipp Hildebrand, but "should the exchange rate again be subject to significant changes, a reassessment of the inflation outlook would be required."

The SNB's forex intervention of spring 2009 to summer 2010 quadrupled the central bank's balance-sheet to $207 billion, driven by buying Euros to try and depress the Franc.

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Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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