Gold spikes on Greek rescue plan

Prices soar as Greece secures a second bailout and as China lowers its reserve requirements for banks.

By TheStreet Staff Feb 21, 2012 1:40PM

Image: Gold (© Anthony Bradshaw/Photographer)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.

Feb 21, 2012 3:19PM
Gold would not be surging if people thought that this plan was going to work. They will be back looking for more. What is really scary is that the US is refusing to address its own gigantic debt problem. I am getting really sick of politicians telling me that we will address the problem in the future when they are no longer in office. Deal with the problem now or there will be rioting in our streets.  Obama is to much of a hack to tell people they can't have all the entitlements they want. Hopefully one of the other candidates will have the stones to get us back on track.
Feb 21, 2012 3:08PM
By 2020, the US will be envious of a 120% Debt-to-GDP ratio.  Our raito is growing 8+ percentage points per year and is already at 105%
Feb 21, 2012 2:46PM
This is not a Greek rescue plan. This is a bank rescue plan.
Feb 21, 2012 2:10PM
Feb 21, 2012 4:58PM
Drill drill drill baby, WAKE UP AMERICA! Also my original post was blocked due to the truth of all this.
Feb 21, 2012 3:47PM
It is not a Greek rescue plan.  It is a bank rescue plan.
americanscapegoat: Thumbs up  You must have read the Greek bailout plan, too.  The ECB is going to distribute the profits it makes from the Greek loans to member nations central banks so they can in turn "sweeten up" the incentives for further debt restructuring.  The EU bailout does nothing for the Greek economy and fleeces the private investors a little more than 50% of their investment in Greek debt.  Merkel austerity plan for Greece makes the Somali pirates look like kindergarteners. 
Feb 21, 2012 4:16PM

HOA Guy .. belt tightening only works for so long and then it becomes starvation.  As far as the rioting, the problem with rapid and excessive austerity is that, it has a downside called a depression.  Any bailout of Greece has to contain elements that will be sustainable, with both sides yielding, for a compromise.  The IMF and ECB need to remember that, they can not destroy Greece as a Nation (containment of default) without tearing apart Europe in the process. 


With elections coming up in Greece, France and several other EU countries, as well as America, it might be a good idea to pay to attention to the common man's interests, instead of the Big Banks bottom line.

Feb 21, 2012 6:41PM
DOUG---- Your garbage about paying attention to the common man, is what got Greece, where they are now.
They elected politicians who promised them freebies.
Now as always happens with quasi socialist/socialist/​communist systems, they ran out of other people money, when the , "producers"  went where they could keep what they earned..
There ain't no such thing as a free lunch, Greece is about to have that brought home to them in a way, they can't ignore..
Broke, is broke, is broke.
They can now hand the freebies back and take their licking or get ready for 200% inflation and carrying backpacks full ,of Drachma, to buy food and heating oil.
Because it is all going to be, "  cash in fist and pay up front  or starve or freeze to death.
No social programs.

Feb 21, 2012 2:44PM
I wish the Greece and the Greeks well. Austerity is never easy, but hey, what's with all the rioting? How is that going to help the situation?
Feb 21, 2012 7:44PM
The economy is failing here in the US.  We are led to believe (some) that we are a thriving country but I feel we are not.  If we do not change our ways we will be in line with Greece.

Hope gold and silver continue to rise.

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