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Gold Price "Galvanized" By Euro Debt Fears

ONGOING concerns over Eurozone sovereign debt – together with anxiety about the weakness of the Dollar – are supporting the Gold Price, according to analysts at two major banks.

"The combination of higher oil prices, weaker dollar and the resurrection of discussions of Greek sovereign risk problems has galvanized the gold market," said James Steel, New York-based commodities analyst at HBSC.

Daniel Brebner, London-based analyst at Deutsche Bank, said investors are reacting to credit issues in the Eurozone periphery – including Greece, Ireland, Portugal and Spain – by "looking for ways to protect themselves from these types of risk, and gold is seen as a way to do that."

Brebner added that the impact of these countries' debt levels on the Gold Price will depend on how Eurozone authorities choose to deal with them.

"Do we see a bailout, do we see more money being extended into these countries, do we see monetary accommodation remaining very much the bias in Europe?" he said. "If that's the case, that should be very supportive of gold markets."

Figures released Friday by Eurostat, the European Union's statistics office, showed that inflation in the Eurozone had risen higher than expected. Eurozone inflation for March was 2.7% year-on-year, up from 1.6% a year earlier.

Analysts expect the European Central Bank (ECB), which raised its main interest rate to 1.25% last week, will now tighten monetary policy further.

"Core inflation has actually gone up and this is a clear sign that the rate hike didn't come too early and that we will clearly see more," said Carsten Brzeski, Brussels-based economist with ING, the Dutch insurance and banking firm. "We would expect at least two more rate hikes this year," he said.

Nick Kounis, Amsterdam-based head of macro research at ABN Amro, also believes another ECB rate rise is likely.

"Although we expect a rate increase at the July meeting, the balance of risks is tilted towards an earlier move," he said.

There are fears that a higher interest rate would further weaken indebted Eurozone members. 

Silvio Peruzzo, an economist at Royal Bank of Scotland, described a rate rise as "clearly a trigger for even slower growth in the periphery."

Of particular concern is Greece, which plans to enact €76 billion ($110 billion) of austerity measures in an effort to avoid having to renegotiate its debt.

"That Greece may have no other alternative but to restructure in order to get itself back on the sustainable debt path is probably the worst kept secret," said Greg Venizelos, a credit strategist at BNP Paribas in London.

Nouriel Roubini, professor of economics at New York University's Stern School of Business, also believes there will be renegotiations of debt.

"The issue of Greece is not whether there will be debt restructuring, but when it will be done," he said. "One can make the same argument for Portugal's government and Irish banks," he added.

The yield on 10 Year Greek government bonds hit 13.8% Friday. The 2010 peak was 12.4%.

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