Gold Markets Priced in a Greece Softer Debt Deal Win

Category: Eurozone | Gold Trading | Greece
November 27, 2012 | Comments Off |
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Greece Debt Deal

Gold Markets Priced in a Greece Softer Debt Deal Win

Gold Prices were slightly boosted as the Euro climbed briefly in a choppy trade to a month’s high after Eurozone finance ministers reached a pact on softening the Greece debt burden. A positive outcome on Greece seems to have already been priced in by the markets as no major movements were seen after the much awaited announcement was made. The much sought after Agreement & a new debt target for Greece is a significant step towards releasing another tranche of loans to a heavily Debt burdened Greece. Investors raised holdings in exchange-traded products to a record. Silver Prices gained to the highest in almost seven weeks. As investors, once again gain confidence in Europe after leaders give Greece another chance, that will help the Euro and in turn Gold Prices. Holdings in ETPs expanded to 2,606.974 metric tons yesterday, data compiled by Bloomberg show. Gold and Silver prices showed little reaction to the U.S. economic data that showed a weaker Texas manufacturing survey and a weaker Chicago Fed national business activity index. Nymex Crude Oil prices were generally range bound. Gold Market Traders & Investors are again focusing on the negotiations among U.S. lawmakers and President Obama regarding the so-called “fiscal cliff” tax increases and spending cuts that are approaching. Serious negotiations are expected to resume this week over the fiscal cliff between Congress and the President. Market Sensitive news may be seen more often for the remainder of the year & trade movements could be very large & choppy as markets wait to see how a number of events play out, especially this week. Also that the Gold and Silver December contracts come to an expiry soon may trigger large movements. The open interest in the Comex Gold Dec Futures contract is over 192,000 ahead of first notice day, which is Friday. There is a fair chance that Profit-Booking will emerge in Gold Futures anytime till Friday. Overall bullish technical developments suggest there is huge potential for more upside in the near-term for Gold & even more for Silver. Declines should be useful for fresh buy positioning.

Meanwhile, Exchange operator CME Group says a force majeure was declared at the Manfra, Tordello and Brooks precious-metals depository in New York as a result of storm damage from Hurricane Sandy. Top Gold producer China aims to produce between 420 and 450 tonnes of the precious metal in 2015, up about 25% from 2011, while consumption may reach 1,000 tonnes by then, the Ministry of Industry and Information Technology said on Monday. Protests are occurring in Egypt after decrees from President Mohamed Mursi consolidating power. The Egyptian situation should be largely supportive for Gold, as it could fuel further safe haven buying by Mideast origins. Gold prices hit an all time high in India lead by a combination of factors including demand from Gold jewelers amid continuing weakness in the Indian Rupee. A weak INR increases the import cost of Gold Bullion. On Monday, Gold Prices hit an all-time record in New Delhi at Rs 32,950 per 10 grams. MCX Gold Prices for Dec hit Rs. 32,464 yesterday.

The Greece Agreement:

Eurozone finance ministers and the International Monetary Fund reached an agreement on reducing Greece’s debt yesterday after 12 hours of talks at their third meeting in three weeks. This breakthrough has been crucial to release urgently needed loans to keep the near-bankrupt Greece economy afloat.Greece’s international lenders agreed on a package of measures to reduce Greek debt by 40 billion euros, cutting it to 124% of Gross Domestic Product by 2020. Greece will receive up to 43.7 billion euros in stages as it fulfills the conditions. The December installment will comprise 23.8 billion for banks and 10.6 billion in budget assistance. Euro group Chairman Jean-Claude Juncker said ministers would formally approve the release of a major aid installment needed to recapitalize Greece’s teetering banks and enable the government to pay wages, pensions and suppliers on December 13. The IMF’s share, less than a third of the total, will only be paid out once a buy-back of Greek debt has occurred in the coming weeks, but IMF Managing Director Christine Lagarde said the Fund had no intention of pulling out of the program. Juncker said the accord opened new hope for Greeks. “This has been a very difficult deal & all initiatives decided upon today will bring Greece’s public debt clearly back on a sustainable path,” he said.

A Huge Relief for Greece:

In Athens, Prime Minister Antonis Samaras went on national television after midnight to celebrate a “new day” for Europe’s most debt-ridden country. While the financing pact rewarded the government’s budget cuts and steps to overhaul the economy, Greece will have to deliver on its commitments to earn each payout. Greece is the currency area’s most heavily indebted country, despite a big “haircut” this year on privately-held bonds. Its economy has shrunk by nearly 25% in five years. Negotiations had been stalled over how Greece’s debt, forecast to peak at 190-200% of GDP in the coming two years, could be cut to a more sustainable 120% by 2020. To reduce Greece’s debt pile, ministers agreed to cut the interest rate on official loans, extend their maturity by 15 years to 30 years, and grant Athens a 10-year interest repayment deferral. They promised to hand back 11 billion euros in profits accruing to their national central banks from European Central Bank purchases of discounted Greek government bonds in the secondary market. They also agreed to finance Greece to buy back its own bonds from private investors at what officials said was a target cost of around 35 cents in the Euro. The Euro strengthened against the dollar after news of the deal was first reported by Reuters. In a significant new pledge, ministers committed themselves to take further steps to lower Greece’s debt to “significantly below 110%” in 2022 — the most explicit recognition so far that some write-off of loans may be necessary from 2016, the point when Greece is forecast to reach a primary budget surplus. “When Greece has achieved, or is about to achieve, a primary surplus and fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt,” German Finance Minister Wolfgang Schaeuble said. The key question remains whether Greek debt can become sustainable without Eurozone governments having to write off some of the loans they have made to Athens. Germany and its northern European allies have hitherto rejected any idea of forgiving official loans to Athens, but EU officials believe that line may soften after next year’s German general election. The German banking association (BDB) said a fresh “haircut” or forced reduction in the value of Greek sovereign debt must only happen as a last resort. The ministers agreed to reduce interest on already extended bilateral loans from the current 150 basis points above financing costs to 50 bps. German central bank governor Jens Weidmann has suggested that Greece could “earn” a reduction in debt it owes to euro zone governments in a few years if it diligently implements all the agreed reforms. The European Commission backs that view. The ECB chipped in by steering profits from its Greek bond holdings back into the rescue program. National governments will funnel their share of the profits to Greece’s bailout account, getting around rules that bar the politically autonomous central bank from directly lending to the state. Finance ministers had to plug a fresh hole after deciding on Nov. 12 to give Greece two extra years, until 2016, to cut its budget deficit, an admission that the austerity-first prescription for solving the crisis is strangling the Greek economy.

Greece Spending Controls:

To make the package palatable for bailout-weary creditor parliaments, unprecedented controls were built into how Greece spends the money. An account devoted to debt servicing was strengthened and the payout of future aid installments was keyed to the Greek government delivering on economic pledges. The disbursement of 9.3 billion euros in the first quarter of 2013, for example, hinges on experts from the European Union, ECB and IMF certifying that the Greek government met a January deadline for carrying out a tax reform.


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