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Europe Fears Trigger Gold’s Fall

Monday, October 10, 2011

Prithviraj Kothari
Managing Director, RSBL and current president Bombay Bullion Association, (BBA)

Gold prices fell on Tuesday, following another sell off wave that dominated global financial markets, on fears the European debt crisis is deepening, which kept investors cautious towards gold’s appeal as a safe haven after the huge drop that took gold prices down by nearly $300 over the past few weeks. This in turn, drove investors to target other low yielding assets including the US dollar, which put more negative pressure on gold prices.

However the trend on Wednesday was different. Gold rose after dipping below $1,600 an ounce as stock markets appeared to have found their footing, but traders said that the metal's correlation with volatile equities could trigger more selling.

Mediocre US service-sector and private-employment data followed grim figures on the euro zone's services sector, contributing to a choppy session as investors deliberated over whether bullion is a shelter from turmoil or a speculative trade that will rise with riskier assets. Ultimately, the mildly upbeat mood in stock markets - which recovered after European officials agreed to shore up euro zone banks against the region's debt crisis - lifted bullion. Spot gold was up 0.5 per cent at $1,628.10 an ounce on Thursday off a low of under $1,600.

US gold futures for December delivery were up $14.30 at $1,630.40 an ounce, with volume sharply below the norm, as traders braced for more volatility after gold's sharp pullback from a record above $1,920 an ounce set in September.

Amongst all the reasons cited, inflation seems to be the strongest reason behind this recovery.

So what does inflation have to do with gold? Everything. This is an inescapable tie-in to the gold market right now. Investors are juggling their risk aversion and no national stone will go unturned as they try to find good places to invest. The trouble is that battle is more about finding the best of the worst as currencies are deliberately undermined and growth grinds to a halt in many places. Gold and other precious metals will continue to be the standout options. They still offer a potential place for people to park assets to try to preserve them in an inflationary environment.

Don’t forget, these places battling higher prices are the same spots that saw a bump in the people with disposable incomes, a rise in the income of farmers when commodity prices boomed, and general growth that might even lead to a whole fresh group of willing investors with assets to preserve. If they can’t do it in their own currencies; if the growth potential in the current global marketplace is dim; then gold and silver might be the ideal alternatives.

The outlook for gold remains generally to the upside, however, we still expect volatility to continue to dominate gold prices, and that could still weigh down on gold prices, but overall, our general outlook for gold prices remains to the upside.

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