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Analysts Say Gold May Be Oversold on European Woes

Release Date: 
Wednesday, May 9, 2012

p>Gold prices dropped to a four-month low on continued worries over European solvency. The euro dropped sharply, pushing gold $19.60 lower to $1,586.20 per ounce as of 6:05 a.m. Pacific Time on the New York Spot market. Spot silver was $0.61 lower at the same time, trading at $28.96 per ounce. (Click here for the most current spot prices.)

Greek elections in June leave open the "distinct possibility of Greece defaulting and exiting the euro, which will have contagion on Spain, Portugal, Italy, etc," Sharps Pixley analysts said in a research note. "In addition, the uncertainty would further aggravate euro-zone economic contraction, which is deflationary."

Nick Trevethan, senior metals strategist at ANZ in Singapore, discussed the effect of these dynamics on gold, saying "the situation in Europe is difficult, but what's happening is that anything that's slightly tainted with risk is being sold, even though the real risk associated with that product is less than one could justify by its price movements."

Investors are currently "overreacting to bad news and ignoring good news" for gold such as improving physical demand from India and especially China, Sharps Pixley analysts noted. They cite examples such as repeal of the 1 percent excise duty on jewelry in India and the sharp increase in Chinese imports of gold in the first quarter of this year. "The weakness in the paper gold market may continue due to technical selling or investor fatigue...but this weakness is masking the massive activities going on in the physical gold market, especially among central banks who may be happy at a lower purchase price," they said.

Jeb Handwerger, editor of GoldStockTrades.com, said problems in the euro zone may be depressing gold now, but that will soon change. "The trend is still higher in gold and silver, and we believe that the safe havens in gold and silver, especially in Europe with this political uncertainty, will cause a rally in precious metals." He added, "the precious metals are oversold and possibly ready for takeoff."

(Source: "Euro Crack Up Not Helping Gold - Yet!" TheStreet.com, May 9, 2012; "Gold, silver continue falling on dollar strength," MarketWatch, May 9, 2012 "PRECIOUS-Gold dips to 4-month low on Greece uncertainty," Reuters, May 9, 2012)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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