2011-12-30

Forced to sell positions tied to the price of gold in order to cover losses in other asset classes

The gold price dropped $18.86, or 1.2%, to $1534.74 per ounce Thursday morning as the U.S. dollar added to its recent gains against a basket of the world’s other leading currencies. In overnight trading the spot price of gold tumbled to $1,521.80 per ounce – its lowest level since July 6th of this year – as the dollar reached an intra-day high against the euro currency. The gold price later pared its losses after U.S. weekly jobless claims came in at 381,000 – above the 375,000 consensus estimate among economists.

Peter Boockvar, a market strategist at Miller Tabak & Co., noted in a report to clients on Wednesday that “The easier part of Italy’s bond auctions this week took place earlier today. But a good test of the appetite for Italian debt will be tomorrow’s bond sales that have maturities past three years.”

While the gold price has traditionally served as a safe haven during times of economic stress, the European sovereign debt crisis has fueled a liquidity shortage across the globe. Many financial institutions and investors have been forced to sell positions tied to the price of gold in order to cover losses in other asset classes.

In addition to the need to raise cash, VTB Capital analyst Andrey Kryuchenkov contended that the gold price “is still tightly correlated with equities markets, but also risk aversion is not at the levels we saw in early August when gold de-coupled from everything else and traded with the dollar.”

Looking ahead to the final two trading days of 2011, RBC Capital Markets’ George Gero offered a similarly cautious view on the price of gold. “The selling is the perfect storm of negative lease rates, undesirable technical analysis signs, weakness in the jewelry trade in the U.S. and India, and a stronger dollar. Until after New Years we may not see much in the way of a rally.”

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