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The political shenanigans played out by the Greek Prime Minister this week renewed worries about the health of the European financial system. Mr. Papandreou initially called for a referendum which could have led to Gr..

05 Nov 2011

By Ole S Hansen
The political shenanigans played out by the Greek Prime Minister this week renewed worries about the health of the European financial system. Mr. Papandreou initially called for a referendum which could have led to Greece rejecting the debt plan agreed to just a few days ago. This could have triggered an unruly default which would have had serious consequences for the Euro area and beyond.

In the end the referendum was scrapped after other European leaders in no uncertain terms told Greece that it was not going to get any more money if the referendum passed and it would effectively amount to a decision on whether Greece would remain in the Euro zone.

In a spectacular resemblance to 2008 the European Central Bank under the new President Draghi slashed official rates by one quarter of a percent, just a few short months after having raised them. All previous rate changes in the ECB’s twelve-year history have all been “pre-announced” while this one came out of the blue highlighting the worries about downside risks to growth, which are now taking hold within the region.

Traders across all asset classes struggled to make heads or tails of all the headlines and events of the week with volatility staying at elevated levels making trading increasingly difficult. The decision to scrap the Greek referendum, the ongoing G20 meeting and the ECB rate cut however all helped risk sentiment ahead of the weekend with stocks and commodities winning back some of what was lost earlier.



Against this backdrop commodities gave back some of the gains from the previous couple of weeks with the Reuters Jeffries CRB index losing 0.7 percent. The dollar recovered sharply as euphoria turned to despair thereby removing the support commodities normally receive from this adverse relation. The soft sector, especially cotton, sugar and coffee, was knocked back while gold having fully recovered from the September onslaught regained some of its safe haven status, while some geopolitical tension supported oil.

Gold receives fundamental and technical boost
Gold received a boost from renewed worries about the stability of the Eurozone and the Euro. Some analysts raised the possibility that the European Central Bank, much against the wish of some of its members, could begin some sort of quantitative easing in order to help pull the Eurozone out of the deep freezer. Real bond yields (adjusted for inflation) remain negative in more than half of the G20 nations thereby supporting non interest/dividend paying assets like gold.

Having spent the last month recovering from the sell-off during September this week saw a move back above 1,700 dollars which pleased both technical and fundamental traders with most now believing the worst is behind us. During the previous two major corrections since 2008 it took 6 1/2 and 5 months respectively to climb back to a new high. Considering the latest correction was the greatest of the three we would therefore be surprised to see a new high before year end. Further consolidation seems to be in order ahead of our year-end target of 1,900 with gold already showing an impressive 24 percent return on the year.


Spot gold, source Bloomberg

(The author is senior commodity strategist at Saxo Bank)


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