Gold price could fall to $1,600/oz

Looming fears of a Greek default, a general Euro Zone slowdown coupled with policy stalemate, and the absence of signs of fresh quantitative easing in the US are all conspiring against the gold price, with the yellow metal down more than $115 in the seven days since last Wednesday, February 29, 2012.

Spot gold prices were $1,672.90 per ounce at 11.10am UAE time (7.10am GMT) today (Wednesday, March 7, 2012), down 6.5 per cent from $1,790 that an ounce of gold fetched last Wednesday.

A surge in the US dollar is adding to the downward momentum in precious metals, and Eurozone debt crisis concerns are once again weighing on investor minds, with tomorrow’s deadline looming for the private sector involvement agreement.

The Greek Finance Minister further rattled markets by taking a hardline and saying that the existing offer is the only offer that the government will consider, and that he stands ready to trigger the collective action clause which would force all bondholders to accept the deal.

Gold fell 2 per cent in yesterday’s session – its steepest daily fall this year – while silver tanked 3.5 per cent to $32.78 an ounce, and is currently trading at $32.84 an ounce (11.10am UAE time). Asian jewellers were seen entering the market once again at these attractive prices, buoying up physical buying in international counters.

“In the gold physical market, activity is brisk. Strong buying is providing support at the $1,695 level. Our Standard Bank Gold Physical Flow Index has pushed considerably higher this week so far (to levels last seen at the beginning of February), indicating that as a whole, physical market participants are net buyers and increasingly so,” said Standard Bank precious metals analyst Marc Ground in his daily report.

Nevertheless, despite fresh physical buying support, analysts believe that the yellow metal has some way to fall before real physical demand and bargain buying props up prices once again. “February to June is typically a period where physical demand is weak (relative to the rest of the year). As a result, we believe that waning physical demand over the medium term could translate into a support level closer to $1,650,” Ground said.

With gold prices closing yesterday at $1,671.40 per ounce on the Comex, technically speaking, gold prices have now broken key support levels of $1,688 (its 50-day moving average) and even $1,674 (its 200-day moving average), suggesting that gold may, pretty quickly, drop to the next big support levels: $1,650 per ounce and then $1,600/oz.

The EU’s statistics office confirmed yesterday a previous report that Europe’s economy shrank in the fourth quarter, as investments pulled back by the most in three years and exports and consumer spending declined. The EU report said that the continent’s GDP contracted 0.3 per cent from the third quarter. Exports dipped 0.4 per cent after a 1.4 per cent increase in the preceding quarter. Household spending fell 0.4 per cent.