Gold reverses losses on China move

LONDON- Gold rose on Wednesday, reversing earlier losses, as the euro rose agaisnt the dollar and equities markets climbed after China surprised with a move to ease credit strains and shore up its economy.



By (Reuters)

Published: Wed 30 Nov 2011, 7:50 PM

Last updated: Tue 7 Apr 2015, 5:22 AM

Investors clutched at news that China’s central bank had cut the reserve requirement ratio for its commercial lenders for the first time in nearly three years to ease credit strains and shore up an economy running at its weakest pace since 2009.

Spot gold was up 0.01 percent at $1,715.55 per ounce at 1214 GMT. The metal has been dipping in and out of positive territory, and earlier hit a one-week high of $1,726 and briefly breached the 100-day moving average at $1,720.45.

Stocks and the euro also recovered early losses to rise after China’s move.

“In the last couple of weeks gold has been behaving like a risky asset, and equities and commodities are up after China’s move,” Commerzbank analyst Daniel Briesemann said.

“We have seen that phenomenon since the last big gold price drop in September; there has been a very high correlation between equities and gold.”

The precious metal is currently more positively correlated to the stock markets than it has been at any time in the last year.

Traditionally, gold has tended to benefit in times of economic or financial market uncertainty, because of the protection it can offer if inflation picks up and because of its immediate convertibility into hard currency.

But gold’s gains are likely to be limited.

Two years into Europe’s sovereign debt crisis, investors are fleeing the euro zone bond market, European banks are dumping government debt, south European banks are bleeding deposits and a recession looms, fuelling doubts about the survival of the single currency.

“Europe is still looking like it’s probably heading for a recession next year, and that issue is not going away. Politicians are dancing around the edges of the problem, rather than getting to the meat of it,” said David Wilson, director of metals research and strategy at Citi.

“It’s difficult to see a sharper fall off in gold,” Wilson said, but if the dollar continued to strengthen against the euro, it was difficult to see a lot of upside to gold either.

Even with this week’s 1.8 percent gain, gold is struggling to convincingly break above the 100-day moving average.

SKEPTICISM

The euro rose against the dollar. A weaker dollar makes gold less expensive for holders of other currencies.

“We still think there’s an enormous amount of skepticism; that people don’t think that Europe is going to deliver,” said Rob Ryan, FX strategist at BNP Paribas in Singapore.

While euro zone ministers have agreed to ramp up the firepower of their rescue fund, they couldn’t say by how much, and may turn to the IMF for more help as a leap in Italy’s borrowing costs pushed the region closer to financial disaster.

Deepening the depressed mood, European Central Bank governing council member Christian Noyer said on Wednesday that Europe’s debt crisis had significantly worsened.

Stocks fell after Standard & Poor’s hit some of the world’s leading banks with a credit downgrade.

US gold

Technical analysis suggested spot gold could rise to $1,743 during the day after it has cleared a resistance at $1,716, said Reuters market analyst Wang Tao.

Trading volume was thin, as some funds have squared positions to lock in profit ahead of the year-end and others have cash tied up elsewhere.

Holdings of the largest gold-backed exchange-traded-fund (ETF), New York’s SPDR Gold Trust and the largest silver-backed ETF, New York’s iShares Silver Trust remained unchanged from Monday to Tuesday.

Silver was down 1.7 percent at $31.38, platinum fell 1.1 percent to $1,521 and palladium was off 1.6 percent at $579.52.


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