(Kitco News) - Gold prices are weaker despite more bad news out of Europe, as the U.S. dollar rises and investors are seeking cash as their main safe haven.

Yields on government bond debt for nearly all European countries, except German bunds, are rising, as investors sell over fears of eurozone sovereign debt contagion. Not only are investors selling debt for southern-tier European countries such as Spain and Italy, but also for healthier northern-tier countries such as France, Finland and the Netherlands.

Earlier in the session stock market values fell sharply and anchored gold, while the U.S. dollar rose and U.S. bond yields fell. As stocks are cutting their losses, gold is also following by trimming its gains. Gold was down even though there were other signs that would normally be price-supportive, such as West Texas Intermediate crude oil vaulting over $100 a barrel. December gold futures on the Comex division of the New York Mercantile Exchange are down about $8 an ounce at $1,775.

Sterling Smith, commodity trading adviser and market analyst at Country Hedging, said one weight on gold Wednesday was the retreat in the U.S. consumer price index, an inflation gauge. The Labor Department said the CPI fell a seasonally adjusted 0.1% in October overall, while the core rate rose 0.1%. The drop in overall inflation came on the heels of a drop in wholesale inflation for October.

“Inflation is gold’s favorite food, it’s like spinach to Popeye, and those numbers were a little disappointing. It put a wet blanket on everything,” Smith said.

Weakness in equities also weighed on gold, which have been very strongly correlated recently. Normally gold and equities are not correlated, but Smith said that linkage is part of the “risk-on/risk-off” trade that has become popular in the short term. “Everyone goes from one side of the ship to the other,” he said.

Analysts have said that weakness in equity prices have prompted some investors to sell profitable positions, such as gold, to shore up losses in stocks.

The dollar’s strength is also keeping a cap on gold in dollar terms, but Smith pointed out that in euro terms, gold is seeing strength because of the sell-off in European bonds.
Gold’s strength in euro terms is likely keeping a floor under the yellow metal and could eventually help dollar-denominated gold price to rise if the rally in the dollar ceases.

Despite the near-term weakness, Arnie Waters, managing member and registered principal of A.L. Waters Capital, said gold has fundamental strength that should push to $1,850-$1,860 by Dec. 1 and to $2,000 in the next six weeks or so. With low interest rates, there is no opportunity cost to hold gold. Longer-term, with central banks printing money it is ultimately inflationary, which is supportive to gold.

If the eurozone were to break up, he said, that would initially be very disruptive to markets and would make the price of gold rise as a safe haven.

Smith said one weight for gold in dollar terms could be the ripple effects of the bankruptcy of MF Global and the difficulties former clients of that firm have had in accessing all of their funds. Smith said those investors are likely not in the market as much as they normally would be, so it could be having an overhang on prices.

Lately, gold has had trouble breaking through $1,800, Smith noted, and because of the buildup of technical chart resistance there, it might take fresh fundamental news to propel gold higher. He said news of the European Central Bank deciding to print money or the Federal Reserve embarking on a new liquidity program could be the spark that lifts prices.

By Debbie Carlson of Kitco News dcarlson@kitco.com


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