The sell-off in the gold price was driven by escalating euro zone sovereign debt concerns

Gold prices continued to slide on Wednesday, by $21.04, or 1.3%, to $1,585.95 per ounce.  The sell-off in the gold price was driven by escalating euro zone sovereign debt concerns, which put considerable pressure on financial markets in Asia, Europe, and North America.

Commenting on the relationship between the currency markets and the gold price, Deutsche Bank analyst Michael Lewis wrote in a recent note to clients that “It is a much more hazardous environment (for gold) at the moment because of the downside risks to euro/dollar.”

However, Lewis added that “One of the supportive factors (is) we’ve already seen quite a dramatic scaling-back in speculative length in gold over the last few months, so that might reduce the positioning risk for the market, but it is definitely going to be an environment where gold is going to struggle and the correlation (of gold to the euro/dollar rate) is going to cause quite substantial headwinds.”

One item that could support gold prices is increased demand for the yellow metal from China.  Yesterday, the Census and Statistics Department of the Hong Kong government announced that imports of gold from Hong Kong to China during the first three months of 2012 were 135,529 kilograms, or 135.53 metric tons.  This represented a more than six-fold rise over the 19,729 kilograms imported during the first quarter of 2011.

In a note on the Chinese data, analysts at Commerzbank stated that “Rising prosperity levels among the population coupled with tighter laws governing property speculation are likely to contribute to sustained high demand for gold in China…Above all, Chinese gold demand should lend key support to the price of gold during the course of the year.”

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