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Gold climbed for a second day on Thursday, regaining the $1700-an-ounce level on improved risk sentiment due to optimism over the Greek private swap initiative and a weaker US dollar.
Gold saw a sharp decline last week on fears that the Greek debt swap would not go through. If the debt swap deal is unsuccessful, Greece won’t receive the €130 billion bailout funds, which is a condition of the deal. If this happens, Athens would be pushed into default and most probably forced to exit the eurozone. As you can imagine, such an event would be contagious, especially for the financial sector, potentially leading to another credit crunch. If a Greek-induced crisis had to occur then it wouldn’t really pay for institutional investors to hold onto gold, since liquidity would be their primary concern. This explains why gold has been reacting more as a risky asset over the last week, rather than a safe haven.