Doubts Regarding Europe’s Sovereign Debt Crisis Fuel Drop in Gold Prices
With Europe facing financial issues, gold has been on a downward journey. Thursday, February delivery of gold dropped $9.70. Following this, it closed at $1,577.20 per ounce. Overall, it spells a $140 loss this week. It’s also a $323 decline – which is significant – from the highest point it reached this year, at approximately $1,900 per ounce.
Despite this, gold has been able to perform better than stocks. Its price has risen by 11% on the year. This is quite high when compared to the 3% decline seen in the 500 index by Standard & Poor’s.
The drop in gold prices is partly because of the doubts people have regarding the efforts being made by Europe to deal with the sovereign debt crisis it has been experiencing in the recent past. There are concerns about the effect it will have on the global economy. Another contributing factor is a slowing of China’s growth.
Gold Gained Strength with Federal Reserve Program
For a large part of last year and the summer of this year, gold was a highly sought-after asset. This was driven by the stock markets becoming volatile. Federal Reserve’s quantitative easing program, which is used when there is a need to increase the supply of money, helped gold. Through this program, lending is encouraged, as is retaining low interest rates. The downside to this was that the policy resulted in the dollar becoming weak.
This pushed gold to a higher level with investors buying the precious metal, as there was a possibility that a weak dollar would lead to inflation. Recent trading has helped the dollar gain strength. It has gone up by 2% in past few days, against other currencies. This has brought down the value of gold, so traders have moved to Treasurys and cash.
Gold Price Likely to Continue Dipping
According to several analysts, gold price is likely to continue falling, as it is unclear what strategy will be used by Europe to prevent a split in its currency union. Analysts state that the bond market in Europe should be closely watched, as it will play a role in determining the direction the euro heads. This will, in turn have an effect on commodities.