Gold Drops, Euro Falls, Fed Doesn’t Ease Posted by James Randolph on July 18, 2012
July 18, 2012 – Gold again dropped on Wednesday as reports surfaced that Angela Merkel of Germany, the country responsible for the fiscal backing of the European bailouts, apparently said she could not be sure whether the European project would work. The US Federal Reserve also abstained from announcing any new economic stimulus plans, which disappointed markets and investors who had been eagerly anticipating such plans.
The spot price of gold had gained toward $1,600 per troy ounce on Tuesday in anticipation of testimony by Federal Reserve Chairman Ben Bernanke during which time any hint at quantitative easing would have given a boost to the gold market. Recent economic data, which is fairly negative had given some analysts reason enough to assume quantitative easing was in the works at some point, despite good manufacturing reports of late.
Following a disappointment by Bernanke, there was a sell-off in gold as holders cashed in, not anticipating any gains. Stock markets did rebound however, and their momentum helped the precious metals to bounce back a bit toward the end of the day.
The spot price of gold was down 0.3 percent at $1,577.90 per troy ounce as US gold futures for August delivery were also down $11.70 per troy ounce at $1,577.80.
With the current lack of physical demand, the gold market has been extremely sensitive to currency markets, particularly strength in the US dollar, as well as anticipations for and talks of fiscal stimulus. Quantitative easing and any of its variants would weaken the dollar, put pressure on long-term interest rates, and put the opportunity cost of possessing gold low, making a very influential opportunity for investors.
Analysts are again stating that we are to remain range bound for the foreseeable future. Analysts with BNP Paribas see the non-farm payroll data, also known as the jobs report, at the start of August as the next US governmental data to affect the gold market significantly.
The euro dropped to a session low against the dollar as German Bund futures reversed earlier losses as traders cited an apparent quote by Chancellor Angela Merkel that the she could not be sure the European project would work.
Commodities fell on Tuesday due to Ben Bernanke’s fairly negative view of the economy as he made comments before the US Senate. Gold has been range bound for six weeks, awaiting direction and the possibility of a new stimulus could be the direction it has been waiting for.