Gold prices showed a muted response to the latest development in the seemingly never-ending sovereign debt saga in Europe

The price of gold turned slightly lower on Tuesday amid strength in the U.S. dollar after policymakers in Europe came to their latest agreement on debt reduction deal for Greece.  After consolidating yesterday near the $1,750 level, the spot gold price fell by $4.26, or 0.2%, to $1,744.85 per ounce this morning.

Gold prices showed a muted response to the latest development in the seemingly never-ending sovereign debt saga in Europe.  Earlier today, euro zone finance ministers and the International Monetary Fund (IMF) announced a series of measures that will reduce Greece’s debt load by €40 billion, with a target of reducing the debt to 124% of GDP by 2020.  Furthermore, policymakers agreed to lower the interest rate on official loans, extend the loan maturities by between 15 and 30 years, and include a 10-year interest payment deferral.

While officials tried to spin the news as positively as possible, financial markets did not responds enthusiastically.  Moreover, several market strategists argued that the agreement is just another can-kicking exercise that buys policymakers more time before the more difficult decisions on significant debt restructurings will need to be made.

Michael Saunders, chief economist for Western Europe at Citigroup, stated on CNBC that “They’ve done the bare minimum just to keep the show on the road to prevent Greece from falling apart and having to leave the euro in the next few months. They’ve not done enough to get Greece back to a sustainable economic or fiscal path.”

“A few months ago (German Chancellor Angela) Merkel herself made a decision that Greece would not leave the euro until the German election is passed because she feared she herself would be blamed for any adverse political and economic consequences,” Saunders added. “That’s why this deal has been done. Merkel wants to keep the show on the road for the time being.”
As for the price of gold, it came under a slight bit of pressure as the euro retreated against the U.S. dollar following the Greek debt deal announcement.  Looking ahead, Saxo Bank analyst Ole Hansen wrote in a note to clients that the gold price “is trying to consolidate now after making the push higher on Friday.”

Hansen went on to say that “A lot of new longs have come to the market and are looking to hold and stabilize around the $1,735-1,740 area…We are creating the foundation for a push higher to levels seen earlier this year.”

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