Euro will stay weak, the dollar will stay strong, and that’s going to cap the gold price

The gold price bounced back on Thursday from yesterday’s sell-off alongside the broader financial markets.  On Wednesday the spot price of gold tumbled to a two-week low of $1,738.47 per ounce before paring its losses in afternoon trading.  This morning, the gold price climbed by $13.57, or 0.8%, to $1,765.17 per ounce.

Today’s gold price rally was driven by a confluence of macroeconomic factors across the globe.  The yellow metal received a boost in overnight trading from speculation that the People’s Bank of China will soon announce additional monetary stimulus measures to help support the nation’s slowing economy.  In Europe, the Spanish government met to approve a 2013 austerity budget – which helped the euro currency rise 0.2% to 1.2901 against the U.S. dollar.  The greenback’s weakness in turn helped lift the price of gold.

Across the Atlantic, several worse than expected economic reports affirmed the Federal Reserve’s view that the U.S. remains at risk of falling back into recession.  Second quarter GDP grew by 1.3%, below the 1.7% consensus estimate among economists.  The Core PCE Index – the Fed’s preferred measure of inflation – increased by 1.7%, missing the 1.8% level the markets were expecting.  Lastly, Durable Goods for August fell by 13.2%, far below the 6.5% decline economists had forecast.
With Thursday’s gold price rebound, the yellow metal climbed back to within 1.5% of its seven-month high reached last Friday.  However, the spot price of gold remains down by 0.4% this week and on pace to snap a five-week winning streak.  Gold prices have oscillated between gains and losses in recent days as the impetus from last week’s QE3 announcement by the Fed has worn off and the European sovereign debt crisis has returned to the forefront.

Commenting on the outlook for the price of gold, Credit Agricole analyst Robin Bhar stated that “Short term, I think we’ll see more consolidation. We’ll have to see how the dollar performs.  As we’ve seen in the last 48 hours, the crisis in Europe has resurfaced…If it comes back with a vengeance, the euro will stay weak, the dollar will stay strong, and that’s going to cap the gold price.”

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