Investor do not believe gold’s long-term upwards trend to be under threat

The gold price plunged Monday morning, sliding $39.65 to $1,672 per ounce. Investors shed long gold positions and investments tied to the gold price amid heightened worries that the continued refusal of the European Central Bank (ECB) to more aggressively aid Italy and Spain will lead to a fresh deflation episode. S&P 500 stock futures fell 13.30 to 1239.70 while oil sank $1.28 to $98.12 per barrel.

Despite gold’s muted initial reaction to the outcome of the December 9 meeting of 27 European leaders, the yellow metal is facing heavy selling in the aftermath of the latest European summit. Officials were unable to achieve unanimous support for a new agreement on tighter fiscal regulations, although the group said it would pursue an intergovernmental treaty with the majority of member nations. In addition, the European nations agreed to provide the International Monetary Fund (IMF) with up to €200 billion in bilateral loans that could be utilized to provide financial support to fiscally strapped nations such as Portugal, Spain, and Italy.

David Mackie, a J.P. Morgan economist in London, commented that “It’s not the grand bargain some people had been hoping for. A door has been opened with the IMF channel, but some people may say that 200 billion euros is simply not enough.”

As for the impact on the gold price, analysts at Commerzbank argued in a note to clients that the lack of financial firepower emanating from the EU summit could present a headwind for the yellow metal in the shorter-term. Gold’s “latest relative weakness can be expected to prompt investors – who recently took a positive view of gold – to continue shedding their positions,” the firm wrote. “A possible price slide below $1,700 may thus accelerate a further slump.” However, Commerzbank also contended that “Despite these short-term tendencies, we do not believe gold’s long-term upwards trend to be under threat.”

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