Gold Prices Continue to Slide on Stronger Dollar (Update 1)
Gold for April delivery closed down $15.40 at $1,724.90 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,740.90 and as low as $1,714 an ounce while the spot price was shedding just $4, according to Kitco's gold index.
Gold prices have now fallen 2% in two days on a stronger U.S. dollar. The currency was helped by better U.S. economic data but also by a weak euro. The European currency was coming under pressure as the Greek government failed to agree on austerity measures needed to secure its second bailout.
Private bondholders must also approve a deal on the loss they are going to take when they swap in old bonds for new, longer dated ones, a key factor in helping Greece pay down their debt. A failure to convince the International Monetary Fund, European Central Bank and European Union that it will cut its deficit substantially could result in a default come mid-March when the country has 14.5 billion euros of debt maturing.
Portugal is also a worry, with many thinking the country might need more bailout money. Interest rates on five-year debt have risen to more than 17%. The combo was weighing on the euro and hurting gold.
Gold prices also rallied 5.5% since the Federal Reserve announced its intention to leave rates low until late 2014. In the Commodity Futures Trading Commission's latest commitment of traders report, speculative long positions rose by 24,000 contracts in the week ending January 31st, which means traders are starting to rebuild their positions. The increase in longs, however does leave the door open to profit taking as well as shift out of gold if investors start to think the Fed will raise interest rates earlier than expected.
"Continued weakness may technically bring us to $1,700 area of support," says George Gero, senior vice president at RBC Capital Markets, "we may only be in a corrections phase for now."
"Gold still has hurdles to overcome, such as potential bouts of dollar strength, technical resistance levels and profit-taking," wrote Barclays Capital in a recent note, but "gold remains in the ascendancy and we remain bullish."
"Fundamentals are still very much in place," says Adrian Day, president of Day Asset Management. There is "concern about easy money in U.S. and Europe and China and elsewhere and concern about global monetary system." The IMF forecast that China would grow 8.2% in 2012, but that it could shed up to 4 percentage points from its target if Europe enters a deep recession. The EU imported 281.9 billion euros worth of goods from China in 2010, up 31% from a year earlier. If China's growth does come under pressure, the expectation is that the Central Bank will pump more yuan into the system in the form of interest rate cuts or by lowering the amount of money banks must hold in their reserves.
More money in the system is typically good for gold, but a recent problem has been, especially in developed countries, that the money supply increases but banks don't lend that money. Day thinks at some point that will reverse, "money that is created doesn't go away, it has to go somewhere ...
Mark Arbeter, chief technical strategist at S&P Capital IQ, says that he is bullish on gold due to the weak dollar policy in the U.S. "The next major hurdle for gold is chart resistance at $1,800 an ounce." Arbeter says that "gold sentiment recently hit its lowest level since late 2008 and considering that gold has been one of the strongest markets over the past 10 years, we think this supports much higher prices."
Gold mining stocks were struggling Monday. Kinross Gold
Other gold stocks, Agnico-Eagle
--Written by Alix Steel in New York.
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