Gold tanks as ECB disappoints

After notching early gains, prices sink as the European Central Bank fails to ramp up its bond buying program.

By TheStreet Staff Dec 8, 2011 12:06PM

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


Updated at 5:21 p.m. ET


Gold prices tumbled as the European Central Bank cut interest rates to 1% and pumped more money into European banks but failed to ramp up bond buying.


Gold (-GC) for February delivery was sinking $31.40 at $1,713.40 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,760.50 and as low as $1,707.80 an ounce, while the spot price was down $34, according to Kitco's gold index.


Silver (-SI) finished down $1.08 at $31.53 an ounce while the U.S. dollar index was rising 0.5% at $78.81.


Gold has had a wild and crazy trading session. The metal was moving higher as the ECB lowered interest rates by 25 basis points to 1%, the previous low achieved after the Lehman Brothers crisis. President Mario Draghi said the eurozone economy faces "downside risk" and "substantial uncertainty."


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The ECB also announced longer-term financing operations of 36 months, which means banks can borrow more money for a longer period of time at a fixed rate. Collateral requirements were expanded as well. The move, in essence, underscored the fact that the ECB is the lender of last resort for banks, not just governments. The Bank of England left interest rates unchanged at 0.5%, and maintained its quantitative easing program at 275 billion pounds.


After early gains, however, gold quickly reversed directions after Draghi said that sovereign bond purchases would be limited and that he was surprised that the market thought the ECB would act more aggressively if certain fiscal union conditions were met by the eurozone. The euro tanked on the news, boosting the dollar and dragging down gold.


A rate cut in and of itself is confusing to gold. Typically low rates are good for the hard asset as the cut devalues the paper currency, but the euro and gold have been moving together of late in opposition to the U.S. dollar. If the rate cut is seen as helping the eurozone, gold could rise with the euro, but if it is seen as devaluing the currency, both assets could head lower. This tug-of-war could keep gold trapped in its trading range.


Another confusing factor for gold was the news that the ECB lent almost $51 billion to European banks for 84 days by swapping euros for dollars with the Federal Reserve. This was part of the massive central bank intervention launched last Wednesday. Accessing the swap lines means that the Fed's balance sheet has expanded and is de facto easing its policy, according to UBS. "This represents a touch more than 8% of the balance sheet expansion seen during the Fed's second quantitative easing program."


James Steel, analyst at HSBC Securities, says "to the degree that heavy U.S. dollar funding is evidence of U.S. dollar shortages in the European banking system and a sign of stress, the demand is gold-bullish." On the flip side, Steel points out that if gold is lent in exchange for U.S. dollars, in face of this liquidity crunch, then it increases the short-term supply of gold in the market, which is a bearish indicator.


The spotlight now turns to Europe's two-day summit, which begins today, with investors hoping to see a big bazooka plan -- whether that is some form of fiscal union, a leveraged bailout fund or more intervention from the International Monetary Fund.


"Fingers crossed they will sort it out," says Mark O'Byrne, executive director at GoldCore, a bullion dealer, adding, "if they don't sort it out then that would create massive volatility in the markets again and I think gold could react quite positively, particularly in euro terms."


If there is some kind of success declared in Europe on Friday, O'Byrne says it might result in gold prices falling in the short term, but he adds that longer term any action won't solve the debt crisis. "I think (that will mean) kicking the can down the road because the fundamental issues won't be solved." O'Byrne thinks gold could rise another 20% in 2012, which would push gold to more than $2,000 an ounce.


The SPDR Gold Shares (GLD) shed just over 2 tons of gold Wednesday. Over the past 10 years gold on average has rallied 1.8% in December; so far prices are down 0.6% this month.


"What you typically tend to see at the end of the year is people balancing portfolios largely for tax reasons," says Will Rhind, head of U.S. operations for ETF Securities. "The last two months of 2010 were actually our second and third strongest months for inflows in the U.S. exchange traded funds . . . so we could see some money moving around from now until year end."


O'Byrne echoes this sentiment. "Last year there was a small increase in the price of gold in November and a small increase in December and then there was quite a sharp fall in January . . . I think it's possible we may see the same thing again." Gold tanked 5.5% in January of this year but since then has rallied 31% and is up 23% for the year while the S&P 500 ($INX) is flat.


This leaves hedge funds and traders either selling gold to book profits for the year or buying gold to show clients that they own an asset whose performance is beating the S&P.


Gold mining stocks tanked Thursday along with broader equities. Barrick Gold (ABX) closed down 3.1% at $49.59, while Newmont Mining (NEM) fell 2.4% to $66.06. Goldcorp (GG) dropped 3% to $50.40, and NovaGold (NG) shed 2.8% to finish at $10.55.


Dec 8, 2011 5:19PM

people are getting smart, get out while you still have money


Dec 8, 2011 5:37PM
So some moron wrote last week or so that the European situation was taken care of , what a bunch of B.S., But I should know better, these idiots lie al the time about everything, just so stocks go up for one day, cash in on the suckers profits, and then pass the buck to all the consumers. Happy Holidays Suckers, we will do it all again in a week or so.
Dec 8, 2011 5:54PM

Europe is done,.  Gold "tanks" only because they sell it off to raise cash....worthless, backed-by-nothing cash which is still tied to paper currency.  Europe has embarked on their own "QE" program as we did and printing money at warp speed, as we still are.


Readers, massive hyper inflation is on our horizons.

Dec 8, 2011 6:21PM
I wonder how dinner is going in Europe?  You think they are serving Bull or Bear? Or, perhaps American turkey?    Tomorrow will be interesting?  Getting to be just like betting on red or black in Las Vegas.
Dec 8, 2011 6:42PM
Soccer ballThe problem with widgets is you need people that can afford to buy a widget before you can sell them. As the anti-labor movement drives down wages demand drops and widgets don't sell. We need to reverse course and increase wages so people will buy the widget and as demand for widgets increases, widget builders will have to hire more workers to make more widgets and then more people can afford widgets and buy them so more workers must be hired to met the widget demand. Demand side economics is the only real economics and were shooting ourselves in the foot by not standing up for the middle class workers being driven toward the poverty line.Nerd
Dec 8, 2011 8:12PM







Dec 8, 2011 6:06PM
We are dependant on foriegn countries too much, like Europe,China.One world government is on the way.
Dec 8, 2011 6:23PM

What kind of a wager would you put up on your latest baseless comment.  Where is your data or is some simple b.s. you've gleaned from listening to your friends at Faux News?

Where's the inflation you make pretend economists are constantly warning about.  Present one piece of evidence that supports your contention.  There is very little demand, there is not nearly enough money in the economy as it is.  How the hell do you believe inflation will or can occur when there is negative growth?  That paper you state as worthless was converted into more than a few real products by me just this week.  And the week before and the week before and it will be converted into gasoline tomorrow morning.  Yeah it's worthless all right. 

You obviously possess little or no actual knowledge with regard to economics.  Also, dear folks, we are NOT too dependent on foreign countries.  Reality shows it is the other way around.  Stop listening to the pin heads at Faux News and attempt to educate yourselves.

Dec 8, 2011 6:23PM

I'm tired of hearing about the ****ing **** in Europe, **** them, this country is going down the ****ing toilet!

Dec 8, 2011 6:12PM

Another concerned American

We are dependant on foriegn countries too much, like Europe,China.One world government is on the way
When you make have to expand your customer base...hence selling in europe, China and etc.  This also goes toward lowest cost per widget and having cheap labor build them, where practical.  The one world government...that part I agree and fear.
Dec 8, 2011 5:25PM

Glad I got out yesterday...gave back weeks gains today.  Hummmm, maybe buy tomorrow morning depending on what Europe is doing when I get up.


Euro is poised to go up.

Dec 8, 2011 5:21PM

KING not a Newt fan--- NY Republican Rep today announced he is hoping that Romney is the Republican Nominee. He recalled Newt's tenure as House Leader as rocky and unproductive ending in Republicans dumping him. Asked if others agreed with him he said those who served with Newt are not anxious to see him nominated. His view as he was quizzed is that Newt is all about Newt and continues to show the same tendencies as a candidate for President. He said Newt is extremely intelligent but lacks focus on seeing things through. He also compared him to Obama as an intelligent guy who will not listen to anyone else or compromise. So, is Newt charming the country with his intelligence just as Obama did? According to King he is and the country would be better served to have Romney a guy who listens, gets consensus and gets things done. Interesting comments.

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