Gold spikes on Greek rescue plan

By Ross Tucker

Gold prices surged Tuesday after the approval of a second bailout package for Greece propped up the euro.

Gold (-GC) for April delivery was rising $28.70 at $1,754.60 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,758.40 and as low as $1,727 an ounce, while the spot price was adding $21.20, according to Kitco's gold index.

Silver (-SI) was rising 90 cents to $34.12 an ounce, while the U.S. dollar index was down 0.2% at $78.98.

Jon Nadler, a senior metals analyst at Kitco Metals, noted that market action has hinged on Greek headlines for weeks, with equities and the euro rising on positive news and falling after missed deadlines. With the deal now in place, Nadler believes investors can return their focus to the bigger and more problematic picture.

"Now that the red wax seal is drying on the 130 billion euro package and the many strings that are attached to it, the markets can focus on the remaining troublesome items -- banking sector problems and Greece's own inability to avoid coming back to knock on the EU's door for more assistance, at a later date," Nadler said.

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As part of the deal, Greece has to carry out steep budget cuts that would slash its debt to 121% of its gross domestic product by 2020, which could create more strain on an economy that's already in its fifth year of recession and facing the risk of social uprising ahead of its upcoming April elections. Debt right now is at 160% of GDP.

Optimism over the deal buoyed stocks, as the Dow Jones Industrial Average ($INDU) breached 13,000 for the first time since May 2008. But the long-term prospects for Greece remain uncertain.

"There appears to be little doubt that in order for the country to bring debt down to 120% of GDP such further help will be necessary. As things stand right now, if Greece is lucky, that ratio might get down to 129% by -- 2020 or so," Nadler said.

"The official creditors won the battle. Greece will be given the money so that it can service their debts. They will have a European Commission task force embedded into Greece to push for compliance, and the escrow-like account ensures a priority to debt servicing," says Marc Chandler of BBH FX Strategy. "However, in the long game, it is not so clear. A Greek 3.0 package cannot be ruled out."

Gold prices were also getting a boost from China's decision to lower its reserve requirements for banks. The People's Bank of China announced over the weekend that it was knocking down its reserve-requirement ratio by 0.5%, a move aimed at boosting lending. Some are interpreting this as a sign that China's economy could be slowing.

Gold mining stocks were riding gold prices higher Tuesday. Kinross Gold (KGC) was gaining 3.5% at $11.34 while Randgold Resources (GOLD) was 1.4% higher at $112.62.