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Gold Lower as Traders Cover Portfolio Losses

Release Date: 
Monday, September 12, 2011

Gold prices started the week lower, as traders cashed out to cover losses in other markets on fears that Europe's debt crisis could take a turn for the worse. Despite this pullback, gold prices have increased by 30% so far this year and by 22% in the third quarter alone, their largest quarterly gain since 1986, driven by investors seeking an alternative to other assets in their portfolios.

The surprise resignation Friday of European Central Bank executive Juergen Stark shook markets already concerned about the state of euro-zone finances. Worries about the stability of the currency union mounted over the weekend. Investors seem to view a credit squeeze on the continent as increasingly likely, with Greece seen as standing on the edge of a default and market participants focusing on the chance that Moody's Investors Service may cut the credit rating of some large French banks.

"We've got a little liquidation in gold," said Frank Lesh, a broker and analyst with FuturePath Trading. "Right now, (gold) is sort of serving as a liquidity center."

Analysts said gold may rebound, as retail buyers and investors have stepped in this year when steep declines presented buying opportunities. Physical demand may also receive a boost as buyers in India, the world's largest gold market, buy precious metals ahead of the wedding season.

"Gold is held as part of a wider portfolio of assets, so when you see blanket selling of equities, then gold will come down at the same time," said Standard Chartered analyst Dan Smith. "Having said that, of course, it has tended to do well on worries about Europe and currency strength, but the wider picture needs to be taken into account, so that is why gold is struggling at these higher levels."

"As the week begins, gold should benefit from the scaling back of risk appetite on what appear to be rising fears of a Greek default, contagion to the rest of the periphery and the impact on banks," said UBS in a note.

(Sources: "Gold Drops in New York as Investors Sell to Cover Stock Losses," Bloomberg, September 12, 2011; "Gold eases as investors sell to plug other losses," Reuters, September 12, 2011; "Gold Drops As Traders Cash Out To Cover Losses," Wall Street Journal, September 12, 2011)

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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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