Gold Rallies as Greece Downgrade Boosts Investor Demand for a Haven Asset

Gold futures had their highest jump today for the month on Greece's debt rating cut, boosting the appeal of precious metals as safe haven assets. The focus has once again been put back onto the looming debt crisis in Europe.

By Pham-Duy Nguyen
May 20, 2011
BLOOMBERG

Gold futures rose the most this month after Fitch Ratings cut Greece’s credit rating, boosting the appeal of the precious metal as a haven asset.

The euro tumbled as much as 1.2 percent against the dollar after Fitch said a “soft” restructuring of Greece’s debt by European Union policy makers would be considered a default. Europe’s financial crisis, accelerating inflation and fighting in Libya have helped extend gold’s rally into an 11th year, with prices reaching a record $1,577.40 an ounce on May 2.

“Gold is screaming higher,” said Matt Zeman, a strategist at Kingsview Financial in Chicago. “People are buying gold as a hedge against the uncertainty in Europe. There’s a lot of focus again on the euro zone debt crisis.”

Gold futures for June delivery rose $20.60, or 1.4 percent, to $1,513 at 12:26 p.m. on the Comex in New York, heading for the biggest gain since April 29.

“There’s a gravitation toward investments that are paperless,” said Adam Klopfenstein, a senior market strategist at Lind-Waldock in Chicago.

The euro dropped versus all of its most-traded counterparts after Bundesbank President Jens Weidmann, a member of the European Central Bank Governing Council, said the central bank may not be able to accept Greek sovereign debt as collateral if the bond maturities are extended.

Chinese Demand

Gold also gained on signs that demand is increasing in China, where inflation is exceeding government targets.

China’s consumer prices rose 5.3 percent in April from a year earlier, topping the 2011 government target of 4 percent for a fourth straight month. The People’s Bank of China has since mid-October raised interest rates four times and boosted banks’ reserve requirement ratio eight times to a record 21 percent to rein in lending and prevent inflows of capital from overseas flooding the financial system.

“When you hear that a large population source like China wants to own gold, that bodes well for the metal,” said Klopfenstein of Lind-Waldock.

Silver futures for July delivery rose 23.8 cents, or 0.7 percent, to $35.17 an ounce on the Comex.

To contact the reporters on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net.

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