Gold prices hit by pain in Spain

Gold Comex futures bounced back 1.3% at the end of last week but lost all the gains on Tuesday after U.S. workers came back from the Memorial Day long weekend. Gold futures reached as high as $1,582.4 upon New York opening on Tuesday but plunged about 2% as EUR/USD started to slide below 1.25. Intraday on Tuesday crude oil futures also tracked the trading pattern of Euro/dollar and plunged as much as 2%, ending at $90.76. S&P went up 1.1% while Stoxx is flat week-to-date.

Gold futures were trading in the range of $1,569 to $1,583 in Asia and London on Monday, higher than last week's close, as investors were relieved that the pro-bailout New Democracy Party in Greece was leading in all six opinion polls last weekend.

Stock markets also got a boost as the State Council in China has recently introduced a controlled-form of fiscal stimulus by speeding up the approval process for infrastructure projects to counter the slow down in China. The World Gold Council estimates Chinese gold demand will rise to between 900 and 1,000 metric tons in 2012. China's ability to maintain its growth rate above 8% will bode well for gold consumption especially when India is entering a seasonally weaker gold demand period from June to mid-August.

Gold and the U.S. stock market were also cheered by the news that U.S. home prices were falling at a slower rate.

What has caused the sharp turnaround in the euro, gold and oil? The common factor is Spain. Rating agency Egan-Jones downgraded Spain on Tuesday from Bb- to B. The Spanish government also wanted to inject sovereign bonds instead of cash to recapitalize Bankia, an idea not welcomed by investors, pushing the 10-year bond yield to 6.45%, about 25bp lower than the recent high in November 2011. After New York market closed, the Financial Times reported that the ECB rejected Spain's proposal for ECB to lend cash to Bankia indirectly via swapping cash with sovereign bonds, thus avoiding direct capital-raising in the markets. The Spanish government increasingly urged the ECB to step up bond-buying or else the euro currency can be threatened.

The uncertainty in Spanish banks and Greek election outlook will also likely suppress gold trading volume. Bloomberg's net speculators' combined gold positions have dropped to the level as of December 2008 at 106,996 contracts currently.

About the Author
Austin Kiddle

Austin Kiddle is a director of the London-based gold broker Sharps Pixley Ltd.

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