The Uncertainty could be Good for the Gold Market

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(Kitco News) - With U.S. markets closed on Monday, attention will be focused on Europe as Greece continues to work towards an agreement with its European creditors, and the uncertainty could be good for the gold market, said one British-based research firm.

European economists from Capital Economics said in a report published Friday, that time is running out for Greece to reach an agreement. The nation needs to renegotiation a new bailout agreement before the end of the month, which is when the current agreement is set to expire. If Greece can’t get a new bailout agreement, they could be forced to default on their debt obligations, forcing them out of the eurozone.

The fact that no agreement was reached during an emergency meeting Wednesday and Thursday, means there is even more pressure on the two sides next week.

“The failure of the Eurogroup last week to agree even on steps for further discussions on Greece does not bode well for the emergence of a full solution at Monday’s meeting,” said Capital Economics. “This could prompt nerves over whether the ECB will cut off emergency funding to Greek banks on Wednesday.”

Although both sides have said that they are willing to find a compromise, they remain far apart on the details; Greece wants to ease its payments and remove difficult austerity measures, while Germany, in particular, insists on keeping them  since their taxpayers are partially on the hook for the extra funding.

Because of this uncertainty, the commodity analysts at Capital Economics reiterated their target that gold prices will end the year at $1,400 an ounce.

“Indeed, the prospect of a further escalation of the crisis in the euro-zone suggests that the risks even to our (above-consensus) forecasts for the gold price lie on the upside,” the commodity analysts said in a separate report published Friday.

The economists at Capital Economics said the increased pressure could lead to only a short-term solution, which could keep supporting gold this year.

“Even if a plan is agreed, it is likely only to tackle Greece’s near-term financing requirements and hence kick the can down the road. Finding a lasting solution to Greece’s debt burden that would guarantee its future inside the currency union will be a much bigger challenge,” they said.

“If the euro looks under serious threat, the risks to the gold price would lie firmly on the upside. The European market for gold bars and coins has already taken off since the global financial crisis and would surely receive another large boost from safe-haven demand,” the commodity analysts added.

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