Monday, May 14, 2012

Gold Drops to 4 ½ Month Low on Euro Worries, Risk Off Trade

The risk off trade (sell everything) continued to extend to gold today as worries over the European debt crisis mounted. Continued political gridlock in Greece and problems in the Spanish banking system fed the doubts about the continent’s economic viability and that of its currency, the euro, in its current state. Gold moved higher earlier this year, along with other riskier assets like stocks, as investors thought the euro crisis was receding.

Spot gold hit a 4 ½ month low on Monday, dipping down to $1559.81 an ounce, its lowest point since December 2011. Gold closed in New York on Friday at $1,578.30. An analyst at Commerzbank, Daniel Briesemann, spoke about gold’s current weakness, “Gold is under severe pressure. The US dollar is being seen as a safe haven at the moment and as long as the dollar is appreciating against the euro this is clearly weighing on the gold price.”

With the current trend in place, most market analysts think that gold could test the $1500 an ounce level fairly soon. A dip below that price is also possible as long as the US dollar remains strong against the euro thanks to the European debt crisis. The euro fell to near a four-month low against the dollar, which rose against a basket of currencies. Since commodities like gold are priced in dollars, any rise in the dollar’s value usually implies weakness in commodity prices.

Also weighing on the sentiment for the precious metal, investors in gold futures and options cut their net long positions by 20 percent to the lowest level since December 2008. However, in the actual physical market for gold there is better news. Jewelry makers and buyers of gold bullion seem to be taking advantage of the fall in prices and are stepping up their buying. Physical gold dealers say that “supply is a bit tight in the physical market.”

Overall though, as long as the US dollar retains its current strength, gold prices should continue to drift lower in the days ahead.

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