Gold Down 1 Percent, Spain Affects Euro, Stocks
Posted by James Randolph on July 23, 2012
July 23, 2012 – Gold prices dropped more than 1 percent in intraday trading on Monday over worries about the economic crisis in Spain, which brought the euro to a two-year low against the dollar and brought Spanish borrowing rates to highs.
A second region in Spain, Murcia, has put forth notification that it will need government help, most likely a bailout, after Valencia will make use of a government program in order to attempt to secure its finances.
The sentiment in the face of this news of a second region in Spain requiring a bailout is decidedly negative. Overall, pressure on the euro and larger markets contributed to a downward pressure on gold prices. The spot price of gold fell 0.9 percent to $1,570.04 per troy ounce. During trading early Monday, the price of gold per troy ounce reached $1,568.04.
Analysts with Commerzbank believe the real danger for the price of gold lies in the stronger dollar, which has been dominating currency markets since the ECB announced rate cuts earlier in the month. A strong dollar historically has a negative correlation to gold.
In euro terms, or priced in euro, gold is trading near six-month highs, in the view of analysts at Commerzbank. This could be taken as an indication of the dollar’s strength rather than a weakness in gold.
European shares have dropped 2 percent following the news of Spain’s economic outlook over the weekend. The Spanish 10-year government bond yields hit a high not seen since the euro was instituted.
Investor fears lie in the possibility that the aid request from Valencia will open the floodwaters to the 17 other highly indebted Spanish regions.
According to CMC markets, there is speculation that Catalonia will need a bailout, which would be significant enough to bring the balance sheet of the Spanish government itself into question, possibly requiring a bailout for the sovereign nation and reaching the limit of the funds of the EFSF.
Gold is prepared to discover support on the bottom around $1,559.00 to $1,560.00 per troy ounce, according to Reuters. Prices in gold bullion have remained range bound between $1,525 and $1,675 for more than three months.