2011-12-10

Gold prices succumbed to broad-based selling pressure

Gold price, at $1,712 per ounce, hovered near unchanged to end this week. After moving as high as $1,724 per ounce early morning, gold prices succumbed to broad-based selling pressure. European leaders announced a verbal commitment to pursue a tighter fiscal union, but as has been the case in the past, details were sparse. Of greater importance to financial markets was European Central Bank President Mario Draghi’s continued insistence that the ECB will not be used to fund fiscal deficits on its member nations.

The gold price was also pressured by a rally in the U.S. dollar, which advanced 0.6% against a basket of foreign currencies. The euro slid 0.5% to 1.3349 against the greenback, fueling widespread weakness in the commodities complex. In precious metals, silver dropped 3.0% to $31.62 per ounce and platinum slid 2.2% to $1,493.50 per ounce. The cyclically-sensitive copper price fell 1.7% to $3.50 per pound, and crude oil retreated 2.2% to $98.25 per barrel.

The primary catalyst for yesterday’s sell-off in the price of gold and broader markets was Draghi’s response to a question during the press conference following the ECB’s monthly monetary policy meeting. When asked about the possible expansion of the central bank’s bond-buying program, the ECB President shot down the idea, noting that the European Union treaty prevents “monetary financing” from occurring.

Peter Boockvar, equity strategist at Miller Tabak, wrote in a note to clients that “It’s this one headline that has the market lower…While so many want him (Draghi) to print, he doesn’t want to give EU (European Union) countries a free pass. It’s called tough love.” Boockvar went on to say that “I repeat again, the sustainability of this stock market rally comes down to money printing or not.”

Commenting on the implications of Draghi’s comments for the gold price, Jeffrey Sherman – commodities portfolio manager at DoubleLine Capital, noted that “If the ECB can’t figure out a way to provide liquidity, that creates deflation fears. If deflation takes hold, gold is not an attractive asset.”

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