Gold Price Steady, Euro Meeting in Focus

GOLD PRICE NEWS – The gold price held steady near $1,790 per ounce Friday morning as markets await the outcome of a meeting among euro zone finance ministers in Poland.  While the price of gold stabilized, the euro currency slid 0.7% to 1.3779 against the U.S. dollar. Equity markets in Europe shrugged off the euro’s weakness to post modest gains.  U.S. markets nonetheless looked to open slightly lower, with S&P futures down 2.50 points at 1,201.75.

On Thursday the gold price sunk $31.30, or 1.7% to $1,790.30 per ounce after the European Central Bank (ECB) implemented dollar liquidity measures in coordination with the U.S. Federal Reserve.  The spot price of gold tumbled to a three-week low of $1,772.00 before paring its losses in afternoon trading.  The SPDR Gold Trust (GLD), the world’s largest gold ETF and a proxy for the gold price, slid $2.81, or 1.6%, to $174.40 per share.

Silver headed south alongside the gold price, as it dropped $0.84, or 2.1%, to $39.96 per ounce.  On a positive note, despite the sell-off in the price of gold and silver, precious metals equities finished in the black.  The Philadelphia Gold & Silver Index (XAU) recovered from a 2.2% decline earlier in the day to close higher by 0.2% at 215.18.  Two of the sector’s largest gainers included AngloGold Ashanti (AU) and Kinross Gold (KGC), which climbed 2.4% and 1.0%, respectively.

The primary catalyst for yesterday’s gold price weakness was the announcement of a coordinated effort among several of the world’s largest central banks – including the ECB, Fed, Bank of England, Bank of Japan, and Swiss National Bank.  The measures involved adding U.S. dollars into the European financial system to combat concerns over the health of many euro zone banks.  This latest display of financial assistance in Europe fueled selling in investments tied to the gold price and buying in cyclically-sensitive equities and commodities.  The euro currency also surged on the news, from near 1.37 to as high as 1.3885 against the dollar.

Commenting on the gold price sell-off and broad-based market rally, RBC Capital Markets precious metals strategist George Gero wrote in a note to clients that “Sell stops are being placed by funds looking at other assets as strong stocks are a headwind and gold, while important as an asset allocation, seems to have reached lofty levels.”  Gero went on to say that “ECB is conducting dollar operations and temporarily there could be more stability afterwards in the euro zone.”

While the gold price may face additional headwinds from these measures in the short-term, the dollar liquidity provisions are unlikely to be a game changer for the yellow metal or the European sovereign debt crisis over the longer-term.  The reason is that while they may help to shore banks’ short-term funding needs, they do not address their sovereign debt exposures.

Barclays Capital Research elaborated on why the measures are no panacea for the European financial system in its own report on Thursday.  “The EUR has rallied as a result of the measure: it offers term USD liquidity to strained European banks and gives some breathing room to the European authorities,” the firm wrote.  ”However, the move is being amplified by short positioning and is likely to be short lived. This measure just alleviates one of the symptoms of the euro area debt crisis and, if anything, confirms the liquidity constraint that banks are facing.”

As Barclays alluded to, there are several other key constraints that the European financial system is facing.  One of the most significant is the fact that the debt burdens of many of the PIIGS far outweigh those nations’ ability to generate economic growth.  Regardless of how much liquidity the ECB provides to its banks, it cannot create capital – which is a far more binding constraint for European banks.  In light of this, the sovereign debt crisis is unlikely to be meaningfully improved by the dollar liquidity provisions.  While the gold price may face additional headwinds from these actions in the days and/or weeks ahead, the longer-term economic backdrop for the price of gold remains quite favorable.