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Gold and Silver Under Pressure from Dollar

June 22, 2012 – The European sovereign debt crisis coupled with a slowing global economy contributed to large setbacks in gold and silver prices Thursday.

Gold futures registered its largest dollar and percent drop seen since April 4th, 2012, losing more than $50 per troy ounce, or 3.11 percent. Silver recorded a new 52-week low, shedding 5.46 percent and losing $1.55 per ounce. At the same time, the dollar rallied as the euro had its worst session in five months.

Investors said the sell-off was prompted in part from comments from Federal Reserve Chairman Ben Bernanke regarding the lag in the economy.

“Gold has been selling off because of all the anti-inflationary headlines,” says George Gero, RBC Capital Markets Precious Metals Strategist. Gold is a historical hedge against inflation.

“Fed warning on the economy, weak unemployment data, weak manufacturing data are all anti-inflationary,” added Gero.

“Everything going on right now is Europe—fear that it will dampen growth,” says Kevin Grady, a trader with Phoenix Futures & Options. The fear of a global slowdown and concerns about stability in the euro zone are causing investors to rush into the relative safety of the US dollar. The run-up in the greenback has been putting pressure on dollar based assets including gold, silver and also, oil.”

“Everything is flight to quality—US dollar and Swiss franc but, not gold,” said Grady. “If there is a currency crisis, you don’t want to be short gold,” he said, warning against the dangers of shorting gold. “Very dangerous to short gold.”

A recent report from Barclays Capital management analysts notes that gold has “failed to differentiate itself as a safe-haven asset” in the short-term, but the larger macroeconomic trends remain positive for gold. Low interest rates, partially bolstered by the continuation of Operation Twist, are one of the macroeconomic trends that benefit gold over the long term.

RBC’s Gero agrees with this analysis and suggests that the dip in prices could be used as a significant entry point into the market over the coming period. “Every time we have had a sell-off, it’s turned out to be a buying opportunity,” he said.

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