Gold Declining Despite A Weaker Dollar

on Dec 5, 2012

On December 4, gold prices slipped below $1,700 an ounce for the first time in four weeks with Democrats and Republicans making little progress in deciding how to avoid the approaching tax cuts expiry, known as the US fiscal cliff. And while the precious metal edged up slightly on Wednesday, it still hovered near its weakest level in a month despite a weaker dollar.

**Gold Prices below $1,700**
As reported by the Financial Times on December 4, gold slumped to a four-week low, with prices sliding 1.4 percent in the spot market to touch $1,690.64, their lowest since the beginning of November. Bloomberg reports that gold futures for February delivery dropped 1.5 percent to $1,695.80 on the Comex in New York, while touching $1,692.60 earlier, the lowest level for a most-active contract since November 6. Among the reasons for gold’s plunge was the stalemate in fiscal cliff discussions in the US which dragged commodities down.

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“Clients aren’t necessarily negative on the metal,” commented Edel Tully, precious metals strategist at UBS (NYSE:UBS), as quoted by the FT, adding that participants were “frustrated” and were struggling “to have a clear view”. The downward movement of gold came despite a weaker dollar, which normally supports gold prices.
The FT quotes traders as saying that while investors remained positive about the medium-term outlook for gold, they had become cautious about its short-term direction after recent sluggish performance.

**Slight Rebound**
!m[The Precious Metal under $1,700 an Ounce on US Budget Stalemate ](/uploads/story/967/thumbs/pic1_inline.png)On December 5, Reuters reported that gold slightly edged up, to trade at $1,700.84 by 06:21 GMT. Gold futures for delivery in February rose to $1,702.80. “We continue to see a risk of further sharp moves in gold after the dead cat bounce yesterday,” noted Australia and New Zealand Banking Group (ASX:ANZ) in a report, as quoted by Reuters. “We are biased towards a near-term technical decline targeting $1,670 but remain constructive on medium term fundamentals.” The FT in turn quotes Afshin Nabavi, head of trading and physical sales at the gold refiner MKS Finance as seeing gold prices falling to $1,675, at which point “demand will come through”.

**Gold Pillars**
The FT notes that while last December gold tumbled more than 10 percent, there were some potential catalysts for the gold market over the next month, with one of them being the prospects for further monetary easing by the US Federal Reserve, which is expected to come up with a replacement of its Operation Twist programme at its upcoming policy meeting.

The US fiscal cliff could also potentially boost gold prices, with Reuters quoting Lynette Tan, senior investment analyst at Phillip Futures, as noting that if the US actually fell off the cliff, “we are likely to see some buying of gold for store of value and also on the outlook that the US dollar may depreciate further.”
Demand from central banks is yet another factor supporting gold. On December 5, Bloomberg reported that the Bank of Korea had increased its gold reserves by as much as 20 percent in November. “Central-bank buying is a solid pillar for gold,” pointed out Nick Trevethan, senior commodities strategist at Australia & New Zealand Banking Group, as quoted by Bloomberg. “It’s not a story that will go away soon.” Brazil’s central bank was also recently reported to have increased its gold holdings for a second straight month, to the highest level since 2001.


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