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Tue 6 Dec 2011 05:31 PM

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Gold slips on Europe debt fears, downgrade warning

Investors are now expected to keep a close eye on an EU summit on Friday in Brussels

Gold slips on Europe debt fears, downgrade warning
Helping to limit the fall in gold, the euro rebounded against the dollar

Gold slipped on Tuesday, hit by persistent fears about Europe's debt crisis after Standard & Poor's warned it could downgrade euro zone nations if no concrete plan to tackle the crisis emerges, but a rebound in the euro helped limit further falls.

The rating agency's warning it might downgrade 15 countries including Germany and France came hard on the heels of a Franco-German initiative to enforce budget discipline across the 17-member zone through EU treaty changes.

Spot gold eased 0.2 percent to $1,719.30 an ounce by 1125 GMT, extending a 1.4 percent drop in the previous session. It traded below the 100-day moving average at $1,726.33, which it broke below in the previous session.

Investors will keep a close eye on an EU summit on Friday in Brussels, where the focus will be on new rules to tighten fiscal integration. Analysts say a summit that falls short could lead to a harsh market reaction that could force a rapid reappraisal by policymakers.

Helping to limit the fall in gold, the euro rebounded against the dollar after data showed German industrial orders in October posted their strongest reading in 19 months. . A weak dollar makes commodities priced in the US unit cheaper for holders of other currencies.

"The market is currently being driven by politics and particularly by development in the euro zone. I expect there is now some caution with the meeting on Friday and the ECB meeting on Thursday," Peter Fertig, a consultant at Quantitative Commodity Research, said.

Although gold is regarded as a safe haven asset to shield investors in times of uncertainty, it has increasingly become prone to pressure from selling in the wider financial market, moving in tandem with other assets as investor sentiment remains fragile. Investors are also likely to keep a close eye on a European Central Bank (ECB) meeting on Thursday, when the bank is expected to cut its main interest rate for the second month running, taking it back to a record low of 1.0 percent or lower if the bank decides a 50 basis point cut is needed.

Australia's central bank cut interest rates by a quarter point to 4.25 percent on Tuesday as tamer inflation at home allowed it to take out some policy insurance against the debt crisis engulfing Europe.

Monetary policy easing raises the inflation outlook and benefits gold, seen as a good inflation hedge.

"Apparently, $1,750 is a tough resistance to break. The market is in need of strong fundamental impetus to break above this mark. Thursday could provide such an impetus as the ECB will meet for its policy meeting," Credit Suisse analysts said in a note.

"Ahead of the ECB meeting, we think sideways trading is the most likely outcome."

Trading volumes were also expected to decline because many traders have closed books to lock in profit before the end of the year, reducing liquidity in the market and increasing the volatility.

Holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, were unchanged at 1,297.929 tonnes by Dec. 5, just below a near four-month high of 1,298.534 tonnes hit on Nov. 30.

Silver slipped 0.1 percent to $31.99, while palladium was down 0.3 percent at $632.03. Platinum fell 0.2 percent to $1,514.24.

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