Precious Metals Remain Strong as Greece Nears Deadline

Source: Eric McWhinnie, Wall St. Cheat Sheet  (2/7/12)

"Although the euro is giving a boost to the dollar, gold and silver continue to maintain key support levels."


Precious metals posted their worst daily performance of the year on Friday. A stronger than expected but highly criticized unemployment report added strength to the U.S. recovery story and the dollar. Now, the U.S. dollar continues to climb higher as Greek politicians struggle to agree on an austerity plan that is needed in order to secure another bailout for the country. Although the euro is giving a boost to the dollar, gold and silver continue to maintain key support levels.

After headlines read that Greece was hours away from a deal last week, the markets are still waiting on some type of a resolution. International creditors are demanding more austerity measures from Greece, but failed to reach an agreement over the weekend. The austerity measures are a precondition to Greece receiving another bailout. On March 20, Greece has a €14.5-billion (B) bond payment to make, and currently does not have the funds to do so. However, another bailout does not solve the underlying problem of too much debt. Brian Dolan, chief currency strategist at Forex.com explained, "If a deal is reached, we think it will likely be the high point in terms of good news in the Eurozone debt crisis. Markets are likely to conclude that even with a deal, Greek debt levels are still unsustainable in the long run."

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Even though the U.S. has debt problems of its own, investors are quick to seek out safety in the U.S. dollar by purchasing U.S. Treasury instruments. In fact, demand is so strong the treasury is considering permitting negative interest rate bids in auctions for treasury bills (T-bill). In a closed meeting last week, dealers and treasury officials discussed selling T-bills above par value. Thus, when the T-bill matured, investors would receive par value, representing a negative interest rate. The T-bills could gain value in the secondary market, but the willingness to initially buy bonds at negative interest rates, without even considering inflation, represents strong demand for the dollar as a safe haven.

"As long as the United States maintains its modest growth and the EU continues to disappoint, you would expect the dollar would continue to strengthen, and that wouldn’t be positive for gold," said Carl Firman, an analyst at VM Group. On Monday, gold prices reached as low as $1,714 per ounce (oz), while silver declined to $32.98/oz. However, both metals are holding key support levels. As my premium subscribers know, gold has significant support at $1,680/oz, while the $30/oz price point is an important level to watch for in silver. Although both metals are subject to volatility, their long-term trend of being a true safe haven remains in place. The treasury’s willingness to consider allowing negative rates at T-bill auctions also provides investors with another reason to choose gold over dollars. Gold critics are often quick to point out that gold does not pay dividends or interest. However, with negative T-bill interest rates at auction being discussed, the dollar could soon lose this interest rate advantage over gold.

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Eric McWhinnie, Wall St. Cheat Sheet

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To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

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