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Gold steadies as debt crisis looms over euro

Apr 11 2012 14:22 Reuters

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London - Gold steadied on Wednesday after rising for four straight days as the intensifying eurozone debt crisis threatened to undermine the euro and offset any potential safe haven demand for the metal.

The euro rose on Wednesday but has come under pressure in the past week as the debt crisis has reignited. The focus is now on Spain, where the head of the central bank said on Tuesday commercial banks would need more capital if the economy continues to deteriorate.

Benchmark 10-year Spanish yields touched 6% for the first time since early December on Wednesday, having risen by more than two-thirds of a percentage point in the past week alone, while peripheral banking stocks have been pummelled.

Spot gold was last down 0.1% on the day at $1 658.16 an ounce by 12:24 GMT, while US.June futures were down 0.1% at $1 659.80/oz.

Gold in euros was last down 0.6% at €1 261.17/oz, having touched two-week highs the previous day above €1 271.00.

“We think gold will be in a range of $1 600 to around $1 690 or $1 700, which is a fairly wide range. But I think it will be difficult for gold to break out of that range,” Standard Bank analyst Walter de Wet said.

“What we are seeing is growing interest to buy in the physical market below $1 630. Should we drop below $1 600, the demand will be pretty strong,” he said.

The correlation between gold and the euro/dollar exchange rate strengthened on Wednesday to reach its most positive since early January, above 65%. That means the gold price is more likely to move in tandem with the single European currency than it was just six weeks ago.

“If there are problems in Europe, we will see the euro weaken against the dollar... What it would do in this environment, where we’ve seen macro selling in gold over the last couple of weeks, is at least for now it won’t push gold higher, but at least it will make people think twice about liquidating long positions,” De Wet said.

Safe haven

Adding to the chances of a safe haven rally in gold was a powerful earthquake off the coast of Indonesia, which prompted tsunami warnings for the entire Indian Ocean.

Gold, the dollar and US government debt benefited in recent years from a bout of safe haven interest from investors, with gold rallying more than 1% and US Treasuries yields hitting four-week lows in the previous session.

The prospect of more monetary easing, which strengthens the outlook for higher inflation, also supported the sentiment in gold, regarded as a hedge against rising prices.

“If weak data continues, the Fed will have to intervene again to stimulate consumption,” said Jeremy Friesen, a commodity strategist at Societe Generale in Hong Kong.

“The next couple of years will be really challenging for global growth, and central banks will be relied on as a crutch to get us through.”

Italian one-year borrowing costs rose for the first time since November at a sale of short-dated paper on Wednesday, reflecting fresh doubts in the market about the more indebted eurozone nations and nerves ahead of a larger three-year sale on Thursday.

Hong Kong’s gold exports to China rose 20% in February on the month as appetite for the precious metal remains strong in China, which is expected to overtake India as the world’s top gold consumer this year.

Some suspected the number could include purchases from the public sector, as the market was largely quiet during a post-Lunar New Year holiday slump in February.

“On the public level, China’s central bank will continue to accumulate gold, which is easier than liberalising their capital account and currency,” said Friesen of SocGen, adding that building gold reserves would help China’s push to turn the renminbi into a global currency.

Accommodative monetary policy will remain an incentive for private investors to buy into gold, he added.

Silver fell 0.4% to $31.67/oz, pushing the number of ounces of the metal needed to buy one ounce of gold up to 52.5 from 50 just one week ago, reflecting gold’s relative outperformance.

Platinum and palladium eased, with platinum down 0.2% at $1 589.99/oz and palladium off 0.4% at $633.97/oz.

Data earlier in the day that showed car sales in China had cooled in March following sharp gains in February weighed on palladium.

Palladium is used mainly in catalytic converters in engines of vehicles powered by petrol. China is now the world’s largest car market and is chiefly petrol-driven.
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