Gold in favour amid debt risks

A woman is reflected on a mirror inside a gold jewellery shop in the western Indian city of Ahmedabad.

A woman is reflected on a mirror inside a gold jewellery shop in the western Indian city of Ahmedabad.

Published Jul 15, 2011

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Gold slipped on Friday after rising for the past nine sessions, though growing risks surrounding US and euro zone debt crises have left investors few safe alternatives except perhaps precious metals, the Swiss franc and yen.

The US dollar initially slipped against the euro and Treasury prices dipped after Standard & Poor's warned there was at least a 50 percent chance it will downgrade the US credit rating in the next 90 days, but with stress-test results of European banks due later, traders were reluctant to make big bets.

With the heightened risk that the world's most liquid sovereign bond market may lose its top rating, together with contagion in Spain's and Italy's bond markets, asset allocation has become very difficult for investors with global remits.

Even emerging markets with their relatively higher growth rates and big piles of foreign exchange reserves have struggled recently, making it difficult for investors to preserve capital other than putting them in perceived safe-haven assets.

“Since the prospect of a downgrade would directly hit the perceived safety value of US Treasuries, it probably does mean that global investors would be looking for a different kind of safe asset if you will,” said Michael Kurtz, head of strategy, Asia with Macquarie Securities.

“It's hard not to see Asia benefiting, not simply because there are sovereigns in Asia that are beginning to look stronger in relative terms but also because the US dollar would be likely to decline in that scenario,” Kurtz told Reuters Television.

The euro hit an intraday high around $1.4200 versus the dollar after the S&P announcement before trimming some of its gains to settle back at $1.4173.

Against the low-yielding yen , the greenback was trading at 79.13 yen, though some short-covering demand after this week's sharp drop and before the weekend is expected to lend support to the pair.

Though the recent flurry of warnings by ratings agencies is widely seen as a move to jolt US authorities to end a looming debt deadlock, Todd Elmer, FX strategist at Citigroup, said S&P's emphasis on the need for a more sustainable medium-term fiscal path posed a more formidable challenge.

“This presents a much higher hurdle for policymakers and, as such, represents a more serious threat to the US dollar,” Elmer said in a note.

Ten-year Treasury note futures to 124-14 after spending most of the session in the red. Yields on 10-year notes were unchanged on the day at 2.95 percent, though risked climbing higher. After Moody's warned it may cut the US rating, Treasuries sold off in the New York trading session.

The past three months have favoured the Swiss franc, gold and US Treasuries. The Swiss franc ETF is up 9.19 percent over the past three months while the SPDR Gold ETF has gained 6.5 percent.

The Bank of America Merrill Treasury Master index is up 3.5 percent while the S&P 500 and the MSCI emerging markets stocks index is down 0.82 percent 3.79 percent respectively.

A recent spike in Italian and Spanish bond yields has demanded a greater urgency in tackling Europe's debt crisis, and further downgrades of the credit ratings of Portugal and Ireland have made clear that the lack of a comprehensive solution threatened to drag bigger countries into the debt crisis.

Gold was down 0.3 percent at $1,581.59 an ounce, still within sight of a record $1,600 an ounce after a nine-day rally pushed prices up as much as 7 percent. Silver was up 0.2 percent at $38.27, just below a two-month high of $39.34 hit in the previous session.

NO QE3

Demand for risky assets also received a setback after US Federal Reserve Chairman Ben Bernanke deflated some hopes of a

third round of stimulus for the struggling economy. The earlier two rounds of quantitative easing were powerful drivers for

equities and commodities.

Hong Kong shares dipped, weighed down by Chinese property stocks after China on Thursday extended home purchase restrictions to more cities.

Japanese shares were slightly up on bargain buying. Foreigners have turned into net buyers of Japanese equities for two successive weeks.

Citigroup says Japan now ranks at the top of the global earnings revision index in key regions.

Technology counters in Asia got a boost from internet giant Google Inc's strong results which sent its shares surging higher by 12 percent.

The MSCI index of shares for Asia ex-Japan was largely flat. For the week it is down nearly 3 percent, its biggest weekly decline since mid February.

Bernanke's comments took the wind out of the oil markets for most of the Asian session, though US crude for August delivery bounced a bit to $95.86 a barrel after finishing the previous session at $95.69. - Reuters

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