Gold slips on eurozone downgrades

Prices dip as cuts to Portugal's and Hungary's credit ratings strengthen the US dollar.

By TheStreet Staff Nov 25, 2011 12:15PM

Image: Gold (© Anthony Bradshaw/Photographer)By Alix SteelTheStreet

Gold prices were falling Friday as two European debt downgrades and a stronger U.S. dollar pressured prices.


Gold (-GC) for December delivery was losing $1.70 at $1,694.20 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,702.70 and as low as $1,672.60 an ounce, while the spot price was down $1.10, according to Kitco's gold index.


Silver (-SI) prices were shedding 30 cents at $31.58 an ounce while the U.S. dollar index was up 0.4% at $79.38.


Moody's slashed Hungary's credit rating to junk status following a similar move by Fitch on Portugal, leaving the euro falling, the dollar rising and gold headed lower.

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U.S. markets are open for a half day Friday and the light volume was ramping up selling pressure on gold. "We could see $1,650 support and now $1,725 resistance," says George Gero, senior vice president at RBC Capital Markets.


Despite longer and more substantial lending from the International Monetary Fund, Europe still can't find a credible solution to its debt crisis. German Chancellor Angela Merkel and French President Sarkozy promise to discuss changes to the European Union treaty in a summit December 9th. Any sort of grand action, including more firepower from the European Central Bank or Eurobonds, would require changes. The two leaders still disagree on fundamental issues like the ECB lending unlimited amounts to countries.


"The eurozone is looking worse than the U.S." say Ross Norman, CEO of SharpsPixley, adding, "a firmer U.S. dollar and weak euro has taken a little bit of a shine off of gold." Norman notes, however, that speculative long positions on the Comex are growing, which he says means traders are rebuilding positions after the big washout in September when prices tanked 10% in weeks.


There is "doubt about policy makers' ability to come to a consensus and come up with a proposal that the populous will accept," which he argues will continue to be positive for gold despite short term volatility.


Italy was able to raise 10 billion euro over 6 months at an auction earlier today but had to pay almost double what it did at its last auction. There weren't that many buyers, pointing to investors' reluctance to lend money to the country.


Underpinning gold's volatility has also been a slew of central bank buying. According to the IMF, Russia, Belarus, Colombia, Kazakhstan and Mexico bought 25.8 tons of gold in October. Conversely, Germany cut 4.7 tons of gold from its reserve to mint coins. Tajikistan also cut 0.4 tons.


"These central banks, including China and Russia, hold huge U.S. dollar and other foreign exchange reserves. Even a small shift to gold will have a major effect on its price," says Mark O'Byrne, executive director of GoldCcre, a bullion dealer. "Despite the increase in central bank gold reserves, their central banks still only hold some 5% of their reserves in gold."

The theory goes that if central banks increase their percentage holdings of gold even slightly they would have to buy a significant amount of gold to reach that target. "Even a small portfolio reserve allocation into gold would create a very large increase in demand for gold," O'Byrne says.


Gold mining stocks were beaten up Wednesday, but were mixed in Friday as equities edged up. Barrick Gold (ABX) was rising 0.6% to $48.18 and Newmont Mining (NEM) was gaining 0.5% at $64.55. Meanwhile, Goldcorp (GG) was sliding 0.4% to $48.22 and Randgold Resources (GOLD) was down 0.9% at $104.93.




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