2011-12-20

Gold Price Hovers Near $1,600 After Last Week’s “Beating”

The gold price stabilized near $1,600 per ounce Tuesday morning as the euro currency traded near unchanged against the U.S. dollar. The spot price of gold fell to as low as $1,584.90 per ounce in overnight trading, but later climbed to $1,610.30 as the euro recovered from earlier losses against the greenback. Growing political uncertainty in North Korea also helped to support the gold price, after the nation announced that leader Kim Jong-il passed away due to a heart attack. Asian markets tumbled after his death was reported, but European markets bounced back alongside the euro currency and S&P 500 futures rose 0.4% to 1,216.25.

As investors continued to fret over the effectiveness of European officials’ efforts to combat the debt crisis, the euro plummeted to fresh 11-month lows against the U.S. dollar. The currency cross fell from 1.3370 at the beginning of the week to as low as 1.2945 last Thursday, before bouncing modestly back above the 1.30 level. The U.S. dollar also climbed against the British pound and Japanese yen, as the need to raise cash fueled increasing demand for the world’s reserve currency.

Commenting on the implications for the gold price of the currency markets’ movements, strategists at Deutsche Bank wrote in a note to clients that “Over the past three months, the correlation of gold to euro/dollar has risen to over 50%. This is likely to have occurred as U.S. dollar strength is no longer being accompanied by inflows into physically backed gold exchange-traded funds.”

On Friday, Credit Agricole analyst Robin Bhar noted that “Gold took a beating this week and today bounced a bit as investors see this as a good moment to buy, but it is still vulnerable. I expect gold will stay under pressure as the funding stress is increasing the need for liquidity, and gold is seen as one of the assets to liquidate.”

Saxo Bank senior manager Ole Hansen took a similar cautious stance toward the gold price, contending that “At the moment a lot people are resting their hopes on the fact that physical demand will pull gold back up again, but because of the amount of speculative investment that has gone into this market over the last years, it is obviously exposed on that basis. Gold has received a lot of new followers over the last few years because of its long-term trend, and if we should see a failure to recover, investors might say, ‘Look I lost a lot of money and I don’t dare to try once again’, so it very much depends on what prices will do over the next couple of weeks.”

With the holiday season approaching, the price of gold and other financial assets may begin to consolidate following several weeks of heightened volatility. However, the ongoing turmoil in Europe is likely to remain a critical factor for the markets. In addition, this coming week’s U.S. economic calendar is filled with several key reports. Existing home sales for November are due out Wednesday morning, along with November new home sales on Friday. Thursday’s schedule contains a plethora of data points – including weekly jobless claims, leading indicators for November, University of Michigan Consumer Sentiment for December, durable goods for November, and third quarter GDP. Fed Chairman Ben Bernanke and his fellow central bankers will undoubtedly be paying close attention to these reports as they continue to monitor the economic landscape heading into 2012.

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