Gold price eases as drop in stocks sparks rush to cover losses
General stock market weakness around the globe is seeing some liquidation in the gold market as investors have to sell to cover losses elsewhere.
Posted: Monday , 12 Sep 2011
LONDON (Reuters) -
Gold fell on Monday as investors sold the metal after last week's record highs to cover losses elsewhere, including European equity markets, which were pushed to two-year lows by growing fears about the debt crisis.
World shares hit one-month lows after Group of Seven officials failed over the weekend to come up with anything more than a stated commitment to help stimulate the global economy, and on fears that Greece may default on its debt obligations.
Spot gold was at $1,836.90 an ounce, down 1.1 percent on the day by 1331 GMT. It fell more than 1 percent last week, marking its worst weekly decline since late June.
"We had a similar situation in 2008, when stock markets dropped and pulled gold lower, as some hedge funds had to compensate loses by liquidating gold positions," said Peter Fertig, a consultant at Quantitative Commodity Research.
"Depending on whether the situation in stock markets calms down, this could go on for another couple of days."
Fears of a Greek default rose last week, fuelled by open discussion of the prospect among senior politicians in Chancellor Angela Merkel's centre-right coalition. Greece confirmed on Monday that it had cash for only a few more weeks.
European benchmark indexes fell by more than 2 percent, hurt by more than 10 percent falls in French banking stocks like Societe Generale, BNP Paribas and Credit Agricole, which have substantial exposure to peripheral euro zone debt.
Gold priced in euros rose to a record 1,373.92 euros an ounce as the single European currency hit 10-year lows against the yen and seven-month lows against the dollar .
The gold price has risen by a third so far this year and by 22 percent in the third quarter alone, its largest quarterly gain since 1986, driven by a push by investors seeking an alternative to sinking currencies and volatile stocks.
While it remains reasonably well supported, volatility in other markets is likely to have a knock-on effect on gold.
"People always assume that gold does well in times of crisis, but that is not necessarily the case," said Standard Chartered analyst Dan Smith, citing gold's 28 percent drop from the highs of 2008 to the lows of that year.
"Gold is held as part of a wider portfolio of assets, so when you see blanket selling of equities, then gold will come down at the same time. Having said that, of course, it has tended to do well on worries about Europe and currency strength, but the wider picture needs to be taken into account, so that is why gold is struggling at these higher levels."
Speculators in gold futures raised their holdings last week for the first time since late July, while investors in exchange-traded funds backed by physical metal raised their holdings for the first time last week since mid-August.
The decline in the euro and resulting strength in the dollar have tempered gold in the past two weeks as bullion becomes more expensive to non-U.S. buyers.
"As the week begins, gold should benefit from the scaling back of risk appetite on what appear to be rising fears of a Greek default, contagion to the rest of the periphery and the impact on banks," said UBS in a note.
"While gold is capable of rallying in the face of a strong dollar, an extended upward move in the dollar does put some obstacles in its path."
With the decline in gold prices from last week's record high, buyers have emerged in major consumers like Indonesia and Thailand. Buying in India was muted, although demand was expected to pick up as the wedding season approaches.
Gold demand, which fell in the second quarter of this year, is expected to strengthen by the end of 2011, driven by robust jewellery buying in India and China and recovery in investment demand, senior World Gold Council officials said.
In other precious metals, silver fell by 1.2 percent from Friday's late levels to $40.81 an ounce. Platinum fell 1.0 percent to $1,810.50 an ounce, and palladium fell 0.1 percent to $722 an ounce.
(Additional reporting by Jan Harvey; Editing by Alison Birrane)