Gold Price Slips, Remains Range-Bound

GOLD PRICE NEWS – The gold price retreated $14.68, or 0.8%, to $1,748.78 per ounce Thursday morning after two better than expected reports on the state of the U.S. economy.  Encouraging data on U.S. housing starts and weekly jobless claims helped to pressure the price of gold, which neared their lowest level in over two weeks.  Although European equity markets were lower across the board, S&P 500 futures rebounded to near unchanged at 1,230.50 following the reports.

On Wednesday the gold price fell $17.56, or 1.0%, to $1,763.46 per ounce amid widespread liquidation in financial markets.  The spot price of gold had rebounded from earlier losses, but fell back firmly into negative territory as many U.S. dollar-denominated asset classes faced steeped selling pressure.  The catalyst for the weakness was a report from Fitch Ratings, which cautioned that Europe’s sovereign debt crisis could have a significant impact on the creditworthiness of many U.S. banks.  The SPDR Gold Trust (GLD), the world’s largest gold ETF and a proxy for the gold price, settled lower by $1.85, or 1.1%, at $171.51 per share.

Silver retreated alongside the price of gold, by $0.54, or 1.6%, to $33.84 per ounce.  The sell-off in precious metals was accompanied by losses in gold and silver shares, as the Philadelphia Gold & Silver Index (XAU) slid 2.0% to 205.19.  Notable XAU components moving lower included Newmont Mining (NEM) and Silver Standard Resources (SSRI), which dropped 2.4% and 3.2%, respectively.  One gold stock that bucked the trend, however, was Jaguar Mining (JAG).  The mid-cap gold producer surged $2.41, or 44.5%, to $7.80 per share after the Wall Street Journal reported that Chinese state-owned Shandong Gold Group Co. made a $1 billion takeover bid for Jaguar.  The offer represented a 73% premium to JAG’s prior day closing price, and the Company later confirmed that it has received multiple acquisition proposals “over the past few weeks.”

The Jaguar Mining deal is the latest in a growing trend of merger and acquisition activity in the gold sector.  Many large-cap gold companies have struggled to generate consistent earnings growth due to production lapses and rising inputs costs.  As a result, several of these companies have turned to purchasing their smaller peers in the hopes of delivering enhanced gold price leverage to shareholders.  According to Bloomberg, there have been $23.8 billion of gold-mining company takeovers at an average premium of 25% announced thus far in 2011.

Despite Wednesday’s gold price decline, the yellow metal remains largely within the $1,750 – $1,800 range it has occupied over the past two weeks.  Although the sovereign debt crisis – particularly in Italy – has escalated of late, strength in the U.S. dollar has helped prevent the gold price from surmounting the $1,800 per ounce level.  Yesterday the dollar extended its gains against the euro after Fitch Ratings wrote in its report that “Unless the euro zone crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen…further contagion poses a serious risk.”

Commenting on the impact of Europe’s crisis on the gold price, Saxo Bank’s Ole Hansen wrote in a note to clients that “You can argue that we haven’t seen anything but escalation (in the crisis) in the last two weeks and gold has not done anything meaningful on the upside, but investors have been voting with their caution and moving into gold.”

“The price hasn’t budged so someone is getting rid of gold up here,” Hansen added. “Whether that is because we are approaching the end of the year and the time when profits are booked and locked in … remains to be seen.”

While the short-term outlook for the price of gold remains cloudy, as Hansen discussed, the yellow metal’s longer-term prospects remain bright.  If the sovereign debt crisis leads to further financial market turmoil, central banks are likely to respond with further accommodative monetary policies.  This point was articulated on Wednesday by Eric Rosengren, President of the Federal Reserve Bank of Boston.  In a speech to the Boston Economic Club, Rosengren stated that “Make no mistake, while the scale of the problem is great, that should not dissuade us from actions that make even just a dent…If it becomes appropriate for us (the Fed) to take more actions to try to relieve that (the euro crisis), I fully assume that we would do something.”