Bargain Hunting Lifts the Gold Price, But Investors Remain Cautious

on May 12, 2012
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After hitting its lowest since early January, gold edged up on Thursday (May 10) as bargain hunters lifted prices from four-month lows. Notwithstanding the slight recovery, analysts see this as a possibly short-term increase as investors are expected to maintain a cautionary stance because of the political impasse in Greece, which has raised fears the country may renege on bailout pledges and exit the currency bloc.

Such an outcome would worsen the debt crisis in Europe and affect future gold prices.
Gold was down $3.80 an ounce at $1,552.85 by 0620 GMT after hitting a low of $1,547.99. Bargain hunting, however, had helped gold prices to recover by adding $3.39 an ounce to $1,581.69 by 02:48 GMT. But gains were capped as an inconclusive Greek election raised the risk the country could exit the euro zone and fanned fears of a worsening debt crisis in the region. The Greek election rendered parliament almost immobile over split sentiments on the 130-billion euro EU/IMF bailout which will continue to keep investors slow on their buying, analysts claim.

!m[](/uploads/story/59/thumbs/pic_1_inline.png)Greece’s president will ask politicians on Tuesday (May 15) to stand aside and let a government of technocrats steer the nation away from bankruptcy, but leftists have already rejected the proposal and look set to force a new election they are confident they can win. With Greek political parties failing to make any breakthrough, the euro slipped to a four month low against the dollar, weighing on gold as growing concerns over Greece reneging on its promises to curb its fiscal debt, shook off investors’ confidence in the common currency.

“I think for as long as the crisis in Europe drags on, it’s going to keep sentiment broadly in check. At the moment, gold has been painted with the risk brush. It’s going to be very much a tracker of the equity markets,” senior commodity strategist Nick Trevethan said to ANZ bank in Singapore. “The range should be from just below $1,580, up towards $1,600. The market really needs to get back towards $1,600 or above in order to confirm we have bottomed,” the analyst further pointed out.

Suki Cooper, precious metals analyst at Barclays Capital also shared his concerns regarding the gold recovery. “Gold has behaved closer to risky assets rather than differentiating itself as a safe haven asset and has been winded by the possibility of further quantitative easing being scaled back,” he said. This year gold has indeed moved in tandem with riskier assets as the turmoil in Europe sent the euro to multi-month lows. Consequently, investors turned to the safety of the dollar, analysts said. Gold has a close negative correlation with the dollar’s strength which makes commodities priced in the U.S. unit more expensive for other currency holders. And while it has outperformed the euro so far, this year the dollar strength is weighing heavily on gold prices. “The safe haven trade is still in the back seat and gold remains positively correlated with risk assets and pressured by a strong U.S. dollar,” an RBS analyst said in a note on Thursday.

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