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Greek Uncertainty Could Stop Fed From Raising Rates, Positive For Gold – Analysts

(Kitco News) - According to analysts the gold market is caught in a tug of war between Greece’s latest financial crisis and expectations that the Federal Reserve will hike interest rates as soon as September.

Gold’s recent lackluster performance could indicate that the outlook of higher U.S. interest rates is winning the battle, but now questions are being raised as to whether the Fed can actually raise rates as the Eurozone falls apart.

Sunday, Greek voters sent a clear message to the nation’s creditors, voting 61% against a referendum to accept the terms of the Eurogroup’s latest bailout offer. The results of the referendum have raised the possibility that Greece will be forced out of the Eurozone. According to a report released Monday, from Capital Economics puts the possibility of a Grexit well above 50%.

In an interview with Kitco News last week, Jessica Fung, commodity analyst at BMO Capital Markets, said that she doesn’t think the Federal Reserve can afford to embark on a new rate hike cycle with so much uncertainty in Europe.

The euro has lost significant ground to the U.S. dollar, dropping 7.8% since the start of the year and down more than 18% compared to last year. Fung explained that the stronger U.S. dollar has been hurting the U.S. economy, as lower exports has weakened the manufacturing industry.

However, it is more than just the U.S. that is at risk if Europe cracks apart. Fung added that China’s economy is also sensitive to what is happening in Europe. Similar to the U.S. dollar, the yuan has seen significant appreciation against the euro, which has dragged down China’s exports, also hurting its manufacturing sector.

“If Europe falls apart, the U.S. cannot hike rates. There is not enough strength in the global economy for them to do that. We know that for sure,” she said.

Although gold has seen only lackluster demand as a result of the Greek crisis, Fung warned investors to not underestimate the impact a Grexit could have on global financial markets because this is all unchartered territory.

“When Bear Sterns collapsed did anyone think that that would be the start of the financial crisis? We don’t know what the fall out of this is going to look like,” she said.

Fung isn’t the only one who is expecting the Fed to hesitate hiking rates as Greek enters another round of negotiations. In a report released Monday, BNP Paribas said they are pushing back their expectations of a rate hike to December from September.

BNP Paribas now puts the possibility of a Grexit at 70%.

Bob Janjuah, market strategist at Nomura said in a note Monday that he is not expecting the Greek situation to resolve its self anytime soon and because. He added that it would be a “major policy error” for the Fed to raise rates by September, saying “any hikes by the Fed would add significant risk to markets, risk assets in particular.”

Analysts at iiTrader, said in a note to clients that they are expecting to hear more talk about delayed rate hikes, which they add would be positive for the yellow metal.

“Bulls need capitalize on any talks this week that the Fed should not raise rates due to the continued turmoil in Europe and Greece,” they said.

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By Neils Christensen of Kitco News;
Follow Neils Christensen @neils_C



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