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Gold could rally if market fears over Greece keep escalating

Gold prices haven’t budged much because of Grexit fears over the past few months, however the precious metal may still benefit from the ongoing crisis if it continues to escalate and eventually comes to a head, says Julian Jessop, economist at Capital Economics.

“Initially sight the turmoil in Greece has not had much impact on the gold price, which might have been likely to benefit as a safe haven,” he said in a note to clients this week. “However, we still think that a further escalation of the Greek crisis could be positive for gold.”

Jessop said gold prices, which have traded inside a few dollars of US$1,180 over the past few days, may already be benefiting from safe-haven demand, noting their resilience despite indications of a U.S. economic recovery that\’s clearing the way in which for higher rates of interest south of the border, a possible negative for that yellow metal.

But perhaps more importantly for the future cost of gold are the growing indications of contagion from Greece with other bond and equity markets within the eurozone, he said.

Yields in peripheral countries for example Portugal have recently begun to rise and Jessop believes his US$1,400 gold forecast may prove too conservative in case of a “messy” Grexit.

“A Greek default alone may no longer be a huge surprise and the sums involved would be small in the global scheme of things,” he said.

“However, when the uncertainty undermines investor confidence within the rest of the region, the gold price is likely to climb a lot further. In addition, if Greece does default, the focus may soon move on to the far more serious issue of potential Greek exit in the euro-zone itself.”