S&P's euro threat drags down gold

Prices fall with the euro after Standard & Poor's puts 15 European nations on a negative credit watch.

By TheStreet Staff Dec 6, 2011 1:46PM

TheStreetImage: Gold (© Anthony Bradshaw/Photographer)By Alix Steel

 

Gold prices were falling Tuesday on a firmer U.S. dollar, perplexing traders and analysts who are waiting for a breakout.

 

Gold (-GC) for February delivery was down $11.60 at $1,722.90 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,728.30 and as low as $1,705.70 an ounce while the spot price was down $10.10, according to Kitco's gold index.

  

Silver (-SI) was rising 8 cents at $32.46 an ounce while the U.S. dollar index was flat at $78.60.  

 

Gold prices were sliding lower along with the euro as investors stayed skittish after Standard & Poor's put 15 European nations, including Germany, on credit watch negative, along with Europe's bailout fund, the European Financial Stability Fund.

 

S&P also stated that how Europe emerges from a two-day summit starting Friday will be key in determining any ratings changes. The big proposal on the table is stronger fiscal consolidation between the 17 nations that use the euro. Other eurozone countries won't have any say in national budgets, but there will be legal ramifications for implementation and sanctions if any of the countries doesn't meet its 3% deficit target.

 

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But some experts think even this proposal isn't enough. Phil Streible, senior commodities broker at R.J. O'Brien, says fiscal consolidation would be disappointing. "If they don't come out and provide additional stimulus then I think it is going to be disappointing and the euro currency goes down. I think gold comes down to $1,700 before it bounces."

 

Streible says that if European leaders do something positive, which in his view would entail more stimulus, then the euro would rally and take gold with it towards $1,800 an ounce.

 

The problem with gold is that it's not acting like it should. Panic in the eurozone should be triggering haven buying. Instead, the stronger U.S. dollar is weighing on prices. Meanwhile, gold and stocks have been trading in tandem of late. Ordinarily a boost in investor confidence would fuel a rally in stocks and a slump in gold, as traders move money into riskier assets. However, the metal has been trading in lockstep with stocks as investors liquidate gold positions during stock-market sell-offs to cover losses. 

 

Not only has gold's identity been murky, but prices are testing a very important support area, which if breached could lead to significant downside.

 

JPMorgan Chase (JPM) wrote in a recent note that gold was starting to test the 26-day moving average. Since November 2008, the gold price has crossed below this area only twice and has not stayed below that level for two weeks in a row. Instead gold has mounted a 10% rally, which would take current prices to $1,850 an ounce.

 

JPMorgan was skeptical that this kind of rally would happen. Over the past three years it has taken gold an average of 15 weeks to rally to 10% above the 26-day moving average, but since July 2011, the gold price has taken only 5 weeks to bounce, which signals peak territory.

 

"I was looking at the technical analysis," says Mihir Dange, trader and founder of Arbitrage, who is trying to find direction in the gold price. "I could see gold down to $1,400 in the next year or so or we could be setting up for another huge head and shoulders (pattern) . . . we could be trying to penetrate a new $2,000 high."

 

On the flip side, longer-term gold investors like Jim Rogers, chairman of Rogers Holdings, are unfazed by gold's bizarre price action of late. "I would just suggest that (a gold correction) is what should happen and if gold goes down I will be buying more." Rogers says if gold were to fall to $1,200 then he would buy a lot more. "Many assets go down about 40-50% over a year or two period -- that is not unusual at all."

 

Gold mining stocks were trading higher Tuesday. Barrick Gold (ABX) was rallying 1.2% at $51.09, while Newmont Mining (NEM) was gaining 1.3% to $66.85. Goldcorp (GG) was up 0.8% to $51.42, and NovaGold (NG) was surging 4.6% to $11.11.

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