Gold Prices Hover Near $1,650

GOLD PRICE NEWS – The gold price hovered near unchanged Wednesday, changing hands at $1,647 per ounce.  Gold prices held firm following the news that orders for capital goods rose in August at the largest pace in three months – giving investors hope that a double-dip recession could be avoided.  S&P 500 stock futures rose 4.20 to 1173.70 after trading as low as 1162.30 overnight.  Despite the stronger economic data, commodity prices moved lower across the board with copper falling 2.7% to $3.35 per pound.

On Tuesday, the gold price advanced $24.54 to $1,651.49 per ounce amid a broad-based rally in global financial markets.  In doing so, the price of gold snapped a four-session losing streak in which it lost over $175.  The spot price of gold jumped to an intra-day high of $1,678.10 early yesterday, but pared its gains as trading progressed.  The SPDR Gold Trust (GLD), the world’s largest gold ETF and a proxy for the gold price, rose $3.05 to $160.63 per share.

Silver climbed in concert with the gold price, gaining $1.26, or 4.1%, to $31.68 per ounce.  While gold price volatility has noticeably increased in recent weeks, it has paled in comparison to that of silver.  Gold’s sister precious metal surged from an intra-day low of $26.15 on Monday to as high as $33.58 yesterday, before relinquishing a considerable portion of its gains.

Gold equities spent the majority of Tuesday in positive territory alongside the gold price, but later headed south as the broader equity markets pared their gains.  The AMEX Gold Bugs Index (HUI) turned a 3.9% rally into a 0.9% decline by the close of trading as gold’s failure to signal the end of the current correction weighed on investors.  The Dow Jones Industrial Average (DJIA) settled higher by 146.8 points at 11,190.69, but had earlier risen as much as 325.44 points.  Notable decliners in the gold sector included AngloGold Ashanti (AU), IAMGOLD (IAG), and Newmont Mining (NEM) – with losses of 0.8%, 1.3%, and 1.5%, respectively.

George Gero, senior vice president at RBC Capital Markets, discussed his gold price outlook in a note to clients on Tuesday.  “We may see the new trading range develop at the higher level, $1,625 – $1,700,” in the price of gold, he wrote.  In addition, Gero contended that the broader markets’ rally served as a “major relief” to gold investors – by reducing the likelihood that liquidation fears would continue to pressure the gold price.

Yesterday’s gold price rally coincided with widespread gains in many dollar-denominated asset classes, fueled by a 0.4% rise in the euro currency to 1.3585 against the greenback.  Strength in the euro came amid rising hopes that euro zone officials were considering a more robust financial plan to stem the tide of the sovereign debt crisis.  One measure being discussed would be to leverage the €440 billion European Financial Stability Fund (EFSF) to allow for additional funds to be borrowed – likely from the European Central Bank (ECB) – without increasing the actual size of the EFSF.

While the idea of leveraging the EFSF helped propel the markets higher on Tuesday, such a plan carries with it considerable risks.  Most importantly, it would put German and French taxpayers on the hook for further losses should the financial condition of Greece continue to deteriorate.  Additionally, it would create the potential for further moral hazard risks by other members of the PIIGS, who may not feel as much pressure to get their own financial houses in order.

Regardless of the market’s short-term reaction to the ongoing European developments, Greek sovereign debt continues to signal that a default is looming.  As John Hussman, Ph.D. – founder of the Hussman Funds – noted in his weekly market comment, “The yield on 1-year Greek government bonds closed above 135%.  As I’ve noted in recent weeks, the bond markets continue to reflect expectations of certain default on Greek debt.  All they are working out now is the recovery rate.”

The impact of a Greek default on the gold price would be quite uncertain in the short-term – chiefly due to the potential for broad-based liquidation in financial markets.  If the financial position of the euro zone were to improve following Greece’s exit, the price of gold could come under additional pressure.  However, a Greek default could instead lead to further destabilizations in the European banking system, which would be bullish for the gold price in the months ahead as policy makers implemented pro-inflation policies to offset the deflationary headwinds.