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Gold and other commodities rally on Greek debt deal, Iran and China

Gold April Comex futures rallied 1.89% in New York to $1,758.50 (the highest level since 2 February), crude oil rose 2.56%, dollar index declined 0.36% after the President’s Day weekend as Greece managed to win the Euro 130 billion debt aid to avoid default on 20 March. Gold price may be rallying because of problems in Iran which increases investors’ need for a safe haven, according to Bloomberg, as well as the announcement by the Chinese Central Bank to cut the RRR ratio for banks by 50bp effective 24 February may signal China’s tolerance for more monetary easing.

But the tepid response of the S&P (up 0.07%) and the Euro Stoxx (down 0.34%) gave away that investors are doubtful that Greece can avoid default as austerity will further eat into Greece’ growth which could cause its debt to rise to 160% of GDP by 2020 instead of the target 120%. This uncertainty bodes well for the demand for gold.

In addition stories afloat that the Chinese, especially the private sector, have been stockpiling gold as shown by the large gap between end-user demand for gold in China at 191 tonnes, compared to the sum of gold imports and supply at 327 tonnes as of Q4 2011. The portfolio manager at GMO argued that the rise in gold price in the past 10 years could be more because of emerging market consumer demand than inflation hedging in the West. Emerging countries’ consumers took up 79% of aggregate gold demand in 2000-2010, mainly due to increased savings and many countries’ financial repressions.

The debate on gold as an investment got heated as Warren Buffett stipulated that gold is a fear trade and has no place in a diversified portfolio in his upcoming shareholder’s letter, though this was refuted by many analysts including Casey Research’s David Galland who argued that there is always a place for an alternative asset such as gold rather than stocks and bonds when currencies are debased as their countries over-borrow.    

Robert Jilles
Sharps Pixley, London

22 Feb 2012 | Categories: Gold

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