Precious Metals Overview

Tuesday, July 3, 2012

Gold futures eased Monday as investors weighed whether the European Union’s latest crisis-fighting plan would soon ease the pressure on the bloc’s banking system. Gold futures surged Friday along with the euro and other commodities, rising 3.5% after EU leaders announced plans to let the euro zone’s rescue fund directly recapitalize troubled banks and make the European Central Bank the region’s banking supervisor. But many commodities pulled back on Monday as investors second-guessed whether the steps would have an immediate effect on Europe’s rattled banking system. The euro fell against the U.S. dollar amid reports that the Netherlands and Finland plan to block pieces of the rescue package agreed to last week and data showed continued weakness in global economic activity. The most actively traded gold contract, for August delivery, fell $6.50, or 0.4%, to settle at $1,597.70 a troy ounce on the Comex division of the New York Mercantile Exchange. The euro was recently at $1.257, down from $1.266 late Friday in New York. Gold tends to suffer from a stronger U.S. dollar, as it makes the dollar-denominated futures appear more expensive for buyers using other currencies. Gold prices have typically retreated this year when traders were worried about a potential freeze in Europe’s financial system, choosing the flexibility of cash, and particularly the U.S. currency. Precious-metals markets are “waiting for a more comprehensive and strategic solution to the crisis,” analysts with Bank of America Merrill Lynch said in a note. “Such a move would likely be accompanied by loose monetary policy and higher inflation in northern Europe, which would benefit precious metals specifically.” Gold can benefit from easy-money policies, as investors seek to shield their wealth from the inflation that more liquidity in the financial system can bring. Much of gold’s weakness this year, analysts say, has come as a result of the Federal Reserve and European Central Bank refraining from taking new crisis-fighting steps. Precious metals were also under pressure on Monday from a slate of weak global economic data. A reading on manufacturing activity in the U.S. showed contraction in the sector for the first time since 2009. Similar readings in the euro-zone and China also showed industrial activity weakening. A “general economic slowdown in Europe and Asia is going to hurt gold sales,” said Sterling Smith, a commodity analyst with Citi’s Institutional Clients Group.
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