Greek exit, while most likely fuelling considerable physical gold demand in Europe

The gold price tumbled $21.33, or 1.4%, to $1,545.09 per ounce Wednesday morning amid widespread liquidation on Wall Street.  The spot price of gold moved modestly lower alongside other commodities in overnight trading, but later extended its losses as the U.S. dollar surged higher against a composite of foreign currencies.

The gold price sell-off was accompanied by particular weakness the euro, which fell 0.8% to 1.2584 against the dollar ahead of a key euro zone meeting.  With the decline, the euro reached its lowest level against the dollar since July 2010, during the depths of an earlier phase of the European sovereign debt crisis.

Later today, European policymakers will hold an informal summit to consider proposals to improve economic growth, including the possibility of euro-zone bonds.  However, officials in Germany and France remain divided over various policy measures, and the looming Greek election on June 17 is likely to continue to weigh on the global economy in the weeks ahead.

Commenting on the implications for the gold price, analysts at UBS wrote in a note to clients that “As uncertainty mounts leading up to the June 17 Greek elections, we’re more inclined to bet on a higher gold price but a Greek exit, while most likely fuelling considerable physical gold demand in Europe, could spark a sizeable deleveraging and dis-investment in financial markets.”
UBS added that “The paper gold market would not be immune to this selling. That is gold’s risk and it’s feasible to think the metal could fall below last week’s low of $1,527 before ultimately rebounding sharply.”

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