Gold falls further as dollar takes safe have status

In the Lead: “Achoo! I think I’m coming down with something…”

A third day of losses was in store for gold as the deepening “Euroxiety” took hold of the markets and wiped away most remaining traces of last week’s “Europhoria.” The yellow metal opened the midweek session with a drop of $9 and was quoted at $1,772 the ounce on the bid-side. Albeit bullion appears to remain confined to the $1,750-$1,800 value zone, the possibility of sharp moves in either direction is on the rise given the apparent increase in the number and decibel level of various market alarms that are ringing this morning.

The head-scratcher of the day/week/month is what gold is doing under the $1,900 or even the $1,800 levels with the crisis in Europe undergoing its most intense phase and with the Old World facing what Angela Merkel has called its “biggest challenge since WWII.” Hint: look no further perhaps than them dollar bills in your pocket, as they now remain the “lesser of all evils” for some – make that for many.

Silver fell 23 cents and opened at $34.34 the ounce while platinum lost $10 to start at $1,628 and palladium slipped $9 to the $655 level. Rhodium was unchanged at $1,675 per ounce. In the background, the US dollar advanced modestly on the index but overcame the 78 mark while the euro flashed a $1.3484 quote making traders apprehensive. Crude oil gave back only about 25 cents of Tuesday’s gains and traded at $99.15 per barrel.

Copper, on the other hand, dropped by 1.66% as concerns about Europe weighed on the orange metal’s traders’ minds. Dow futures did not look too good either, in wake of a warning from the Bank of England that the global economy might yet sustain a hit if the crisis in Europe is not resolved. Such declarations are among the last that a commodity spec wants to hear right about now…

Markets remain anxiety-ridden and the principal reason behind such a mood is the persistent rise in Italian government bond yields – they were back up above the critical 7% pivot point once again on Tuesday, despite the “Mario effect” that was supposed to temper the market. In fact, the ECB did cave to American pressure to do something/anything to stanch the bond market hemorrhage and bought some Italian instruments this morning. ECB officials were quick to underline the fact that a one-off buying sortie is not tantamount to a policy change and/or to the advent of perpetual money-printing however.

Moreover, the angst appears to be taking on some “Swine Flu” (yes, that was an attempt at a pun on the PIIGS) attributes; it is now fast spilling over and contaminating the markets of Spain and even France. Spanish bond yields touched 6.3% for the ten-year instruments. The 7% figure equates the “bailout candidate” label to many market observers. Currency traders had seen the $1.35 level in the euro as its own “Maginot Line” – strong, but still vulnerable to a blitzkrieg by the bond vigilante storm troopers. As regards Italy, newly installed PM (and now also Finance Minister) Mario Monti feels “absolutely convinced” that his country will overcome the debt crisis. “Super” Mario is set to unveil his new government within just hours. Observers cannot wait.

Speaking of those who observe the markets and the economies, the Europeans are about to get pretty testy with rating agencies. In the view of many, the “rating game” has engendered quite a bit of the volatility we presently see in the sovereign debt market and it has also bumped up borrowing costs. Last week’s S&P gaffe that erroneously led some to believe that France had lost one of its three “A”s was possibly the proverbial camel back-breaking straw.

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