Gold Price Steady Near $1,650 as Debate Over Europe Rages

GOLD PRICE NEWS – The gold price oscillated near $1,650 Wednesday morning.  Rumors out of Europe that its leaders were prepared to expand the size of the European Financial Stability Fund (EFSF) have led to increased volatility in gold prices as well as in the broader stock and commodities markets.  The UK-based Guardian reported that France and Germany are ready to approve a 2 trillion euro rescue fund for Europe and its ailing banking system.

On Tuesday the gold price initially tumbled toward $1,625 per ounce, but recaptured the majority of its losses in afternoon trading.  The spot price of gold settled with a loss of just $12.68, or 0.8%, at $1,657.85 per ounce, while the U.S. dollar relinquished its gains against a basket of the world’s leading currencies.  Silver followed a similar trajectory to the gold price, but advanced into positive territory as the day progressed.  Gold’s sister precious metal declined to $30.30 in morning trading, but surged back to $32.05, representing a 0.8% daily gain.  The iShares Silver Trust (SLV), a proxy for the silver price and the sector’s largest ETF, jumped 0.9% to $31.33 per share.  Silver prices traded near unchanged Wednesday morning.

As the gold price bounced back, shares of most gold mining companies moved higher.  The AMEX Gold Bugs Index (HUI), which had been down as much as 4.0% at 519.67, finished with a gain of 0.6% at 544.46.  Gold Fields (GFI) and Kinross Gold (KGC) – two of the gold sector’s top performers yesterday – rallied 1.5% and 2.2%, respectively.

News this morning that Agnico-Eagle Mines (AEM) halted mining operations at its Goldex mine in Quebec could weigh on the share prices of gold mining stocks today.  Ground stability issues appear to have led to the decision.  Shares of AEM plunged 12% to $50.20 in pre-market trading.

The gold price and broader financial markets will likely trade based upon news flow related the report from The Guardian that France and Germany “reached agreement to boost the eurozone’s rescue fund to €2tn (£1.75tn) as part of a ‘comprehensive plan’ to resolve the sovereign debt crisis.”  The plan is comprised of two parts – the first of which involves giving the EFSF “additional levers enabling it to offer first loss guarantees for bondholders, be they public or private.”

According to the report, “Senior diplomats say this will deliver a fivefold increase in the fund’s firepower – giving it more than €2tn compared with the current €440bn lending capability. The EFSF will in effect become an insurer, thereby overcoming European Central Bank resistance to the idea of turning into a bank.”

Under the second part, euro zone banks would be recapitalized “to meet the 9% capital ratio that the European Banking Authority is demanding after its re-examination of the exposure levels of 60 to 70 ‘systemic’ banks.”  Although The Guardian acknowledged that “technical details” of the plan have not been finalized, the framework is in place to deploy additional ammunition to tackle the crisis.

While the markets extended their gains following the EFSF news, the report was soon after refuted by Dow Jones Newswires, which claimed that euro zone officials are still debating the size of the bailout fund.

Looking ahead, the gold price is likely to continue to take its cues from the developments across the Atlantic.  A significant increase in the EFSF, as reported today, would inherently involve additional money printing and likely be bullish for the price of gold.  Investors with positions tied to the gold price will thus be keeping a close eye on this weekend’s meeting of euro zone finance ministers, as well as the crucial European Union Summit on November 3, to see the specific components of Europe’s plans.