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Gold Falls 2% to Below $1,600 on Euro Bailout Doubts

Tuesday, 08 May 2012 02:40 PM

Gold fell more than 2 percent on Tuesday, approaching this year's lows and briefly breaking below $1,600 an ounce as fresh concerns over the eurozone debt crisis triggered a technical selloff.

Bullion, which has largely failed to rally on economic uncertainties this year, was on track for its biggest one-day drop in a little more than two months. Tuesday's tumble cut gold's yearly gain to just 2 percent.

Option volatility based on gold exchange-traded funds also spiked and was set for its biggest daily jump in 2012 as investors flocked to the protection of put options against further downside risk in bullion prices.

Analysts said political uncertainty in Greece and a change of leadership in France had investors doubting whether Europe would come through with the billions of euros needed to bail out its troubled economies.

"Absent new monetary stimulus, gold doesn't make sense. When people are fearful of the fiat currencies eroding their wealth, that's when gold catches its bid," said Jeffrey Sherman, commodities portfolio manager of the $33 billion asset manager DoubleLine Capital.

Spot gold dropped 2.1 percent on the day to $1,603.11 an ounce by 1:29 p.m. EDT, having earlier hit a low of $1,594.94 an ounce, which marked the cheapest price since January 4.

Gold's 2 percent decline was its largest since February 29, when the metal plummeted 5 percent after Fed Chairman Ben Bernanke did not hint at a third round of government bond purchases, or quantitative easing, which has underpinned the metal.

A recent strong run of U.S. economic data has reduced hopes of further U.S. monetary easing, sending gold $200 below a high of $1,790 an ounce reached in late February.

U.S. gold futures for June delivery were down $35.40 at $1,603.70 an ounce in heavy trade, with volume on track for its strongest showing in more than a month, preliminary Reuters data showed.

Silver and platinum group metals also tumbled, in line with sharp losses in other industrial commodities such as crude oil and copper and a triple-digit point loss in the Dow.

"With stocks slumping and with treasuries rallying and risks generally rising ... investors are withdrawing from the gold market, perhaps as margin calls are made, forcing investors to liquidate precisely when they don't want to," Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. said in a note.

The CBOE Gold ETF Volatility Index, which is often referred to as the "Gold VIX" and is based on options of the SPDR Gold Trust, rallied around 14 percent to a reading of 18.6.

Bill Luby, a private investor and author of a blog called "VIX and More," said there appeared to be lots of put buying in the GLD which has inflated the Gold VIX, which was hovering near a historically low level despite Tuesday's spike.

TECHNICAL OUTLOOK BLEAK

Analysts said that gold could fall further if it fails to hold above $1,600 an ounce as there is little underpinning from technical charts under that level.

"The fact that support has been broken on a daily, weekly and monthly time frame suggest that this selloff could get worse," said Adam Sarhan, CEO of investment research and consultant Sarhan Capital.

Sarhan said gold was already testing the lows of 2012 when Tuesday's heavy losses sent the metal below heavy daily and weekly support between $1,620 and $1,630 an ounce as well as its 18-month upward trendline on monthly charts.

Silver was down 2.1 percent on the day at $29.38 an ounce. Platinum fell 1.3 percent on the day to $1,502.74 an ounce and palladium slid 3.3 percent to $629.72 an ounce.

© 2017 Thomson/Reuters. All rights reserved.

   
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2012-40-08
Tuesday, 08 May 2012 02:40 PM
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