The great danger for the gold price is the stronger dollar

The gold price turned lower on Monday as a further escalation of European sovereign debt fears fueled widespread selling across financial markets.  The price of gold fell to as low as $1,562.08 per ounce earlier this morning, but pared its losses to trade down by $12.89, or 0.8%, at $1,571.59.  In doing so, the gold price considerably outperformed other commodities and U.S. dollar-denominated asset classes.

Equity markets across Asia and Europe exhibited a sea of red as well on Monday as speculation grew that Spain may need a more comprehensive bailout after a second region, Murcia, revealed that it needs additional financial assistance.  This followed reports last week that another region, Valencia, was also in dire financial straits.

“The fear now is that Valencia’s aid request is more than likely to open the floodgates for similar requests from the other 17 heavily indebted Spanish regions,” CMC Markets wrote in a note to clients.  “Already speculation is increasing that Catalonia, or any one of a number of regions will be next. When that happens it will be pretty much nailed on that the Spanish government will then eventually need a bailout itself, stretching the funds of the EFSF to its limits.”

As for Greece, the International Monetary Fund (IMF) indicated over the weekend that it will not provide further financial aid to the nation.  German news magazine, Der Spiegel, cited European Union officials who spoke on conditions of anonymity that it is “already clear” that Greece will not meet various financial targets necessary to receive additional assistance.

The combination of turmoil in Spain and Greece provided a significant headwind for the euro currency and led to safe haven buying in the U.S. dollar.  As for the implications for gold, Commerzbank analyst Eugen Weinberg contended on Monday that “The great danger for the gold price is the stronger dollar, because of its long-term negative correlation to gold. That’s definitely still dampening the interest of investors from the United States.”

However, Weinberg also noted that “In euro terms, gold is trading near six-month highs, so it’s not as bad as it first looks. It’s more about dollar strength than gold weakness.  It’s difficult to see the pressure coming off (the euro). But as long as (gold) prices stay above $1,530, they are still in a stabilisation phase.”

Comments

Post a Comment

Popular posts from this blog

Gold edges up on weaker dollar, dovish U.S. Fed policy bets

Image
 Gold edged higher on Monday, helped by a weaker dollar and expectations that the U.S. Federal Reserve will reiterate its dovish monetary policy stance this week. Spot gold was up by 0.1% at $1,943.58 per ounce. U.S. gold futures rose 0.1% to $1,950.10 per ounce. “Gold is firm on the basis that the Fed could adopt a further dovish message with respect to average inflation targeting,” said Michael Hewson, chief market analyst at CMC Markets UK. “If you want to have a policy of average inflation targeting, you’re going to have to go into detail as to how you are going to arrive at that particular outcome.” The dollar retreated on Mond ay, bolstering gold’s appeal for investors holding other currencies, ahead of the Fed’s policy decision due on Wednesday. “If inflation forecasts remain at 2% or below, this could offer gold a tailwind as the zero-yielding metal thrives in a low-interest rate environment,” said FXTM analyst Lukman Otunuga. Market participants are also waiting
Read more

For the gold price, two outcomes are possible.

Image
For the gold price, two outcomes are possible. First is a return to or near the April low ($1,277.40). Second is a drop to a lower low, $1,240 - $1,260. Yet a third possible outcome is that the June and December lows were not a double bottom and one further drop may come. I account that the least likely, and look for a low here by the end of the week, but I'm no more'n a nacheral born durnd fool from Tennessee, so what do I know?   You'd think that an institution charged with promoting the gold industry would produce reports that at least cast the best light on gold's prospects. You'd think wrong, if you're thinking about the World Gold Council. They've been negative on gold for, oh, the last 14 years or so. Today they issued a report that contained a nugget about Chinese business using physical gold as collateral for bank credit ($40 bn worth) but they managed to tease a gloomy forecast even out of this inventive monetary use. That and bad
Read more

The price of gold advanced as high as $1,603.40 per ounc

Image
The gold price broke out to a new all-time high above $1,600 per ounce Monday morning, rising for the eleventh consecutive trading session. The price of gold advanced as high as $1,603.40 per ounce before backing off to trade just the $1,600 level. The yellow metal gained on the back of a surge in borrowing costs for Italy, the latest European nation to see its bond market come under heavy selling pressure. The lack of a deal to raise the $14.3 trillion debt ceiling also helped boost gold prices. The eleven-day rise in the gold price is the longest winning streak since January of 1980. The gold price delivered another noteworthy performance last week, climbing 3.2% on its way to a series of fresh record highs. With Monday’s advance, the gold price extended its monthly and year-to-date gains to 6.6% and 12.5%, respectively. Last week’s two-day Congressional testimony by Chairman Ben Bernanke on the economy and monetary policy revealed that the Fed remains open to the
Read more