Gold Capped atg $1,580, Hit by Another Concentrated Burst Of Selling On High Volume
May 30, 2012
Counter intuitively, gold turned sharply lower due to another bout of concentrated selling despite a distinct lack of market moving news – indeed market news was quite gold bullish. There were mere rumours that Egan Jones had downgraded Spain. The downgrade rumour , which was subsequently confirmed, saw the euro fall only marginally – from 1.253 to 1.248 and little movement in equities.
Gold is weaker again today despite heightened risk aversion on fears that the euro crisis is escalating. Concerns about Italy have resurfaced after their 10 year bond yield rose above the important 6% level this morning.
Gold has recently tracked the euro as many investors opted for the dollar over safe haven gold bullion in the near term. This was graphically seen during the Lehman and AIG crisis when gold also fell in the short term prior to quickly basing and making a speedy recovery soon after.
We would expect a similar pattern to take place again and the counter intuitive short term gold price movement of late will likely soon give way to a reassertion of the gold’s primary secular bull market trend.
Ongoing concerns about the euro, the downgrading of Spain and the risk of contagion is of course bullish for gold but gold can often be correlated with risk assets such as equities (and risk currencies such as the euro) in the short term.
Gold has risen from below €500 to over €1,200 in last 5 years so correlation with the euro is clearly short term.
Gold is inversely correlated with the dollar and all fiat currencies over the long term and best for investors and store of value buyers to fade out the short term noise of gold’s corrections and short term correlation with risk assets.
Greece’s elections on June 17th may be a short term positive for the euro if pro bailout parties win, however this is way too far away to call and the scale of the debt crisis in Europe suggests that national currencies may return or that the euro will be devalued or a combination thereof.
Some market watchers are waiting for central banks to give a clear signal as to whether they are going to inject trillions of more euros, pounds and dollars into struggling economies.
The near certain further debasement of currencies in the coming months will benefit gold.