GOLD ANALYSIS

Gold volatility here to stay

While the price of gold recovered on Thursday after a sharp fall in the previous session, analysts say the metal is in for a lot of volatile, sideways trading.

Author: Ben Traynor
Posted: Thursday , 15 Dec 2011

LONDON (BullionVault) - 

SPOT MARKET gold prices climbed to $1594 an ounce by Thursday lunchtime in London - 1.9% up on this morning's low - while stocks and commodities also regained some ground after recent heavy losses.

Silver prices gained 2.7% to around 29.20 per ounce - still a 9.4% loss from last week's close.

Despite Thursday morning's rally, gold prices too remain heavily underwater on the week - showing a 6.8% loss from last Friday's close.

Wednesday alone saw gold prices drop more than 4%, breaking through the 200-day moving average - which by BullionVault's calculations was sitting around $1613 per ounce Thursday morning.

"Smaller markets tend to get hurt more during periods of heavy selling," explains Ole Hansen, vice president of trading advisory at Saxo Bank in Copenhagen.

"The main problem from an upside perspective is that investment decisions are not being made this time of year which should limit the upside for now."

"We're in for a long sideways volatile market," adds Jeremy Friesen, Hong Kong-based commodity strategist at Societe Generale.

"We can go through weeks, if not months, of slow drawn-out process, because it's ultimately a fiscal problem in Europe that needs to be resolved."

On the currency markets, the Euro struggled to recover much lost ground against the Dollar Thursday morning - following three days of falls that have seen it fall 3% to below $1.30. 

The Dollar Index - which measures the Dollar's strength against a basket of major currencies - is at 12 month highs, up nearly 2% for the week so far.

The fall in gold prices, though, is "not only because of the stronger Dollar," one trader in Shanghai tells newswire Reuters.

"The year-end fund redemption and margin call demand from other markets also contributed to the sell-off...we might see further weakness in prices as the sentiment around Europe remains rather bearish."

The general secretary of Germany's Free Democratic Party - a junior member of Angela Merkel's governing coalition - stepped down on Wednesday, reportedly following a poor turnout in a party referendum on the latest Eurozone rescue plan. The ballot - whose results are due to be revealed tomorrow - was prompted by an anti-bailout FDP member.

Merkel now has "a dead-duck coalition partner whose actions may now become unpredictable," says Nils Diederich, professor of politics at Berlin's Free University.

"That's a risk for Merkel as she tries to navigate parliament through giving up some sovereignty in the name of fiscal union as well as increase taxpayers' input into rescuing the Euro."

European leaders agreed last week to lend up to €200 billion to the International Monetary Fund - which the IMF in turn could then lend to European governments.

Germany's central bank will contribute up to €45 billion "as long as there is a fair distribution of the burden amongst the IMF members," Bundesbank president Jens Weidmann has said.

"If these conditions are not fulfilled, then we can't agree to a loan to the IMF."

Here in Britain, a spokesman for prime minister David Cameron - who opposed last Friday's agreement - has denied reports that the UK will commit €30 billion to the IMF. 

Cameron has reportedly told members of parliament he does not expect Britain will provide more than £10 billion of additional funding. Eurozone ministers are said to have penciled in a British contribution of up to €50 billion, according to a Financial Times report.

In the US meantime, Federal Reserve chairman Ben Bernanke made it clear that he "has no intentions whatsoever of furthering US involvement in the [Eurozone] crisis," according to one Republican senator who a private meeting with Bernanke.

China announced Wednesday it will impose duties on US car imports.

"US vehicles benefiting from subsidies and dumping on the China market have substantially damaged China's auto industry," said a statement from China's Ministry of Commerce.

General Motors vehicles will face total duties of nearly 22%, while duties on Chrysler vehicles will be 15%. Both firms were bailed out by the US government in 2009.

Over in Hong Kong, the world's largest listed jewelry chain Chow Tai Fook saw its share price fall 8% in its first day of trading Thursday. Fellow debutant New China Life, Hong Kong's third-largest insurer, saw its shares drop 9.8%.

"Investors are holding on to their cash, doubtful about not only new stock, but also shares in the secondary market," says Ronald Wan, managing director at China Merchants Securities in Hong Kong, which oversees about $1.5 billion.

"Worries about Europe will keep investors cautious in the months to come."

In India meantime - the world's number one gold bullion consumer according to the most recent World Gold Council data - the Rupee hit a fresh record low against the Dollar today at over Rs54.3 to the Dollar. 

The Rupee has lost more than 20% of its value against the Dollar this year, sending Rupee gold prices to record highs in recent weeks.

 

Editor of BullionVault's Gold News, Ben Traynor was formerly editor of the Fleet Street Letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.