Greece’s Rating Downgrade and the Impact on Gold Prices

The preliminary news of a brewing economic trouble in the Euro Zone began pouring in with the start of FY 2010. The problem that began with Greece, gripped Spain and Portugal as well, jeopardizing the future of Euro, one of the best paper currency alternatives to the US Dollar. The sovereign debt of these nations reached to alarming levels, much higher than their GDPs. The next blow came as Greece requested an EU/IMF sponsored bailout package in April 2010, followed by a credit rating downgrade by Standard & Poor. The debt rating of Greece was reduced to BB+ (non-investment grade) on April 27, 2010.

The industry watchers remain divided on the exact impact of the crisis, yet everyone agrees that any sovereign credit default is likely to destabilize an already slow world economy. As the bailout package is being formulated, another leading agency, Moody’s Investor Service pegged Greece’s rating to Ba1 (junk), down four notches on June 14, 2010. While this has instigated a lot of furor with the European Union expressing a ‘surprise’ over the move, the investors and speculators seem to have taken a different beat. A key fact in the case is that the national debt of the United States has also reached at historic levels, crossing $13 trillion. As a tumbling Euro has lost much of its attraction as an alternative to a weakening Dollar, the traditional preferred commodity gold has regained its sheen.

Much on the similar lines as during the global meltdown of 2008, the investors at various levels have started switching to the yellow metal, as an effective hedge against any further destabilization in the world economy. Apart from the panic-driven consumer demand, the market for speculative positions is also heating up. There is a large section of experts, who have faith in the EU/IMF rescue package for Greece. However, an equally sizable number, including the credit rating agencies, believes that there is a strong probability of administrative issues and implementation risks inherent in the program. Last week has been a witness of the wavering market sentiments, where gold touched the record price of $1,251.20 before reaching $1,214.

Moody’s latest action reflected in the gold spot that hovered around $1,226.95 on Monday. The August delivery futures jumped approximately $5 to reach $1,299.10. ScotiaMocatta of Scotiabank Group expects that after consolidating around the current levels, gold is expected to reach new highs in the coming days. Meanwhile, another leading agency Fitch has clarified that it is not contemplating a rating downgrade for the ailing country, in the near future.