Gold Prices Edge Higher on Euro Zone Worries

Gold prices settled higher in trading today after falling on Monday as worries about the euro zone debt crisis boosted demand for safe haven assets. Gold prices were also lifted by worries that the debt crisis could spread to France, the second largest euro zone economy.

After falling initially, gold for delivery in December on the Comex division of the New York Mercantile Exchange edged up to settle at $1,782.20 an ounce today. Gold prices touched an intra-day high of $1,787.80 an ounce and an intra-day low of $1,760.90 an ounce.

Prices fluctuated for most of the day as investors digested reports that hedge fund manager John Paulson, who famously bet against subprime mortgages, slashed a third of his gold holdings in the third quarter of 2011. Despite Paulson’s move to cut his gold holdings, he and other hedge fund managers are still bullish on gold.

Paulson’s fund lowered its holding in the SPDR Gold Trust ETF to 20.3 million shares from 31.5 million shares at the end of the second quarter, according to a regulatory filing. However, Paulson’s move to slash his gold holdings does not appear to be a sign that he is bearish on gold, according to analysts.

David Meger, Director of Metals Trading at Vision Financial Markets, told CNBC that even though there is pressure from a stronger dollar, dips are seen as buying opportunity and key support levels have held. Meger also said that based on the growing open interest in gold ETFs, he still sees a positive bias in the precious metals complex, particularly in gold by institutional investors, who represent the stronger hand.

Also, with the ongoing debt crisis in the euro zone, the demand for safe haven assets such as gold is expected to remain robust.

Earlier in the day, investors’ sentiment was weighed down by report that the euro zone economy posted moderate economic growth in the third quarter. Recent data from the euro zone has raised worries that the region may be headed into a recession.

The weak economic data boosted safe haven buying, lifting gold prices after Monday’s drop. Gold prices were also lifted by a report that France should also be “ringing euro zone alarm bells” as the country could not make rapid adjustments to its economy.

The debt crisis in the euro zone, which began more than two years, has already started impacting bigger euro zone economies. Last week, Italian bond yields surged to a euro-era high, raising concerns about the third-largest euro zone economy’s ability to resolve its debt problems. The debt crisis in Italy has also led to the resignation of Silvio Berlusconi and the formation of a new technocratic government under Mario Monti. However, the new Italian government faces a huge task ahead.

Spain, another troubled euro zone economy, today auctioned one-year notes at record yields. Meanwhile, yields on 10-year Spanish bonds also rose to a euro-era high.

With the crisis in the euro zone now having a significant impact on larger euro zone economies, there is growing concern about the future of the euro. Unlike Greece, Portugal and Ireland, Spain and Italy are much larger economies and bailing them out will be virtually impossible for euro zone policymakers.

Meanwhile, economic growth in the euro zone remains anemic. The developments in the euro zone outweighed some positive economic data released in the U.S. earlier today.

Earlier today, report released by the Commerce Department showed that retail sales in the U.S. rose 0.5% in the month of October, following a gain of 1.1% in the month of September. October retail sales beat economists’ estimate of an increase of 0.3%.

Meanwhile, a report released by the Labor Department earlier today showed that producer prices in the U.S. fell more than forecast in the month of October. The producer price index dropped 0.3% in the month of October, following an increase of 0.8% in the month of September. Economists had forecast producer prices to fall 0.1% in October. Core producer prices, which exclude volatile food and energy costs, were flat in October.

Another report showed that manufacturing activity in the New York area expanded unexpectedly in the month of November. The New York Fed’s Empire State general business conditions index climbed to 0.61 in November from minus 8.48 in October.

The data released in the U.S. in recent weeks indicates that the U.S. economy is strengthening. However, the debt crisis in the euro zone continues to weigh down sentiment and this could keep demand for gold and other safe haven assets robust in the next few weeks.

Post Written By: Ed Liston Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications. He is widely quoted in various financial publications on the Internet. When Ed is not writing about stocks, investing in stocks, talking about stocks, or otherwise doing something stock related, he likes to go sailing and fishing in his yacht.