Why Europe could drive gold prices further down

The commodity space has been under intense selling pressure this week as the election results in Greece announced earlier this month heralded a new more severe stage of the debt crisis.

While there could be more selling pressure if the crisis in Europe continues to escalate, there was some consolidation in the oil and gold price last week.

The yellow metal is finding some support around the $1,520 level, which is a key support level and the 100-week moving average.

If Europe still continues to dominate then we could see gold slip below $1,500 per ounce, the lowest level since August 2011.

Commodities are impacted by the debt crisis in Europe is two ways.

Firstly, it damages the growth prospects for the economy in Europe as harsh austerity programmes weigh on growth.

Weak economic growth erodes demand for oil and base metals, hence why we have seen an 11% drop in Brent crude oil since March’s $122 per barrel high, and a 10% drop in the copper price since the start of this month.

But the second way this crisis could affect the commodity markets is slightly more complex.

Lower commodity prices could dampen inflation pressures in developed markets, which would give central banks like the ECB in Europe and the Federal Reserve in the US room to pursue more quantitative easing and other liquidity measures to try and boost growth and fix the crisis in the currency bloc.

Traditionally, central bank liquidity is positive for commodity markets, so short-term weakness could translate to longer-term gains in commodities if it encourages central banks to adopt more accommodative monetary policy stances.

But in the short-term the outlook for commodities depends on the developing Eurozone crisis.

The writer is Emea Research Director at FOREX.com

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