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‘Overblown’ Argentine Debt Crisis Ignored By Gold Market

By Neils Christensen of Kitco News
Thursday July 31, 2014 7:55 AM

(Kitco News) - The impact that Argentina’s latest default will have over global financial markets is being “overblown,” which is why it hasn’t created a safe-haven bid for the gold market, said some analysts.

According to some reports, the Dow Jones Industrial Average’s triple-digit losses are due, in part, to the fact that investors are spooked that another country has defaulted on its debt. By noon the Dow Jones plumetted by more than 200 points.

Along with equity markets Comex December gold future are also down; As of 12:23 p.m. EDT, December gold was $8.20 lower to $1,288.70 an ounce.

However, Jeffrey Christian, managing partner of CPM Group, said that Argentina’s default is not similar to other crises and is more of technical issue than a systemic global problem.

Creditors of refinanced Argentine sovereign debt have been in deadlock with the government and the deadline to find a last-minute resolution passed early Thursday morning, putting the government in default.

However, Christian explained that this “default” was already priced into the markets four years ago in 2010 when the initial restructuring negotiations were resolved. During those negotiations, investors took a 70% “haircut” in Argentine government bonds. Some of the debt was later sold to “vulture” investors who tried to force the government to pay the full amount of the original debt.

“This has been going on for years. Most investors have already written off Argentina’s debt and the effects have worked their way through the system already,” he said.

Christian added that the Argentine bond market has been seen as high risk so it doesn’t have the same impact as a stable country going into default.

“Anyone who has had issues with security, looking for a safe investment, has stayed away from Argentina for the last 13 years,” he said.

Howard Wen, commodity analyst with HSBC, agreed that gold has been ignoring the Argentine sovereign debt issue because of its low importance.

“Right now, the bullion market is following what is happening in Eastern Europe and the Middle East,” he said.

He added that Argentina’s latest default is a low-risk situation compared to European debt crisis that swept through financial markets two years ago. The European Union and the euro means that all the countries are connected and if one country, even a small one, has a debt problem, it can easily impact other nations and balloon into a systemic issue.

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It is not just Argentina that has debt problems. Wen also said that Puerto Rico is on the brink of default and has been ignored by the financial media.

“These debt problems appear to be more insular in nature,” he said. “Bullion tends to track more geopolitical instability.”

Jeffrey Nichols, senior economic advisor at Rosland Capital and managing director at American Precious Metals Advisors, said that a few years ago headlines about Argentina’s default would probably have boosted gold prices but now the market is desensitized.

“We’ve heard this story so many times that it has lost its impact,” he said.

George Gero, vice president and precious-metals strategist with RBC Capital Markets, said he is not ready to dismiss the impact of Argentina’s default on the gold and financial markets.

He said the news helped to drag down equity markets; gold prices followed because some funds were probably forced to sell their profitable positions to cover their equity market losses, he added.

Gero also added the default came one day before nonfarm payrolls so some investors would be hesitant to take a long position ahead of that report

He said the default could help to push gold prices up next week as the market digests the news and its full impact.

By Neils Christensen of Kitco News; nchristensen@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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