Summit contains considerable uncertainty for the price of gold

The gold price moved lower Tuesday, trading off $17.00 at $1,706 per ounce before bound back to $1,722. Analysts at Canadian-based Stifel Nicolaus noted that “Physical demand is slowing ahead of Euro summit.” All eyes continue to be on Europe and the summit set to take place on December 9 among European leaders. S&P 500 stock futures traded near unchanged at 1255.60 while the price of gold and broader commodities complex were lower across the board. Oil and copper fell 0.4% and 2.2% to $100.58 per barrel and $3.53 per pound, respectively.

While Standard & Poor’s warning rattled the gold price and gold equities, the ratings agency later placed all 17 nations in the euro zone on “credit watch negative” – representing a 50% chance of a downgrade within the next 90 days. The move came despite an encouraging meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel. The top officials in France and Germany agreed on a proposal to implement amendments to Europe’s governing treaties to provide stricter economic governance for the entire euro zone. The proposal is expected to be presented to the entire European Union at a summit in Brussels on Friday.

Commenting on the implications of the euro zone developments for the gold price, analysts at Commerzbank wrote in a note to clients that “Friday’s European Union summit is the most important meeting over the next few days, though we can expect a long wait before a permanent solution to the crisis is found.”

While the summit contains considerable uncertainty for the price of gold, according to Commerzbank, the firm contended that Thursday’s European Central Bank (ECB) meeting is likely to be a bullish factor for the gold price. The consensus view among economists is for the ECB to lower its benchmark interest rates by 25 basis points to 1.0%. “This should lend support to the gold price since the opportunity costs of holding gold will remain low,” Commerzbank stated. “That said, speculative financial investors are still showing reticence and for the second week running moderately cut their net long positions in the week to Nov. 29.”

In the U.S., Chicago Fed President Charles Evans stressed the need for additional stimulus in a speech on Monday. “There is simply too much at stake for us to be excessively complacent while the economy is in such dire shape,” Evans argued. “It is imperative to undertake action now.”

Last month Evans expressed concerns that Europe’s sovereign debt issues could have significant spillover effects on the U.S. economy. By reiterating his ultra-dovish outlook yesterday, Evans indicated that the crisis has escalated further in recent weeks and therefore warrants further accommodative monetary policies – measures that could provide further support for gold prices.

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