Precious metal prices firm following French downgrade

Though it has yet to break through selling resistance at $1,650, gold has recorded small gains in trading this morning following on from Friday’s announcement from Standard & Poor’s that they were going to downgrade France from a Triple A credit rating to an AA+.

Friday the 13th was an apt choice of days for S&P’s decision, with the rating agency also cutting the ratings of Austria, Italy, Portugal, Spain, Cyprus, Malta, Slovakia and Slovenia. Markets received early inkling of this move, with the euro falling below US$1.27 during trading on Friday (though S&P’s announcement was delayed until after markets had closed).

Short interest in the euro is now at record levels, with banks and politicians also increasingly concerned that Greece will soon become the first European country for 60 years to default on its debts. As the Telegraph reports, negotiations between the Greek government and private creditors broke down on Friday evening, with private creditors refusing to sign up for an “orderly” 50% haircut in the amount owed to them.

In truth, Greece has already defaulted – or at least, that’s what most people would understand to be the case, when the Greek government is insisting that it can’t pay back more than half of the money its borrowed. The issue that the European Union and the banks are dealing with though is a legality: any formal recognition of default will trigger credit default swap payments on the failing Greek debt.

Given the opaque nature of the over-the-counter derivatives market, nobody is quite sure who owes what to whom in terms of Greek CDS. It may turn out that all the obligations net out perfectly, but this cannot be guaranteed given the extremely fragile state of Europe’s banks at the moment (banks being the entities largely responsible for honouring these CDS contracts). As with the Lehman bankruptcy in 2008, this derivative risk is as much about the perception of danger as it is about actual danger: a formal Greek default means there’s a risk of derivatives failing to perform, which leads to panic in the markets and a wild dash for cash, as financial firms have no way of knowing whether or not their worst fears are correct – but consider it prudent to prepare for them anyway.

Unsurprisingly given Friday’s news, stock markets have suffered losses in trading this morning – though commodities are holding up better than might be expected given the “risk off” nature of sentiment at the moment, owing to resilience in crude oil prices. This in-turn is helping precious metals’ bid, with gold, silver, platinum and palladium all up marginally in trading this morning. As long as oil prices remain firm, the broader commodity complex and precious metals will remain well supported.

Tags: debt crisis, Europe, gold price, Greece, oil prices

Author: The GoldMoney News Desk

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