Stock Market Watch

Gold Prices Tumble on Margin Selling

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Gold prices tumbled in trading today due to margin selling triggered by a sell-off in equity markets. The sell-off in the equity markets was sparked by U.S. deficit stalemate and worries about the sovereign debt crisis in the euro zone.

Gold, which is seen as a safe haven asset in times of turmoil, suffered today as investors liquidated some of their positions in the precious metal to cover for losses in equity markets. Gold has recently tracked riskier assets as investors continue to liquidate their most profitable investments.

The major reason behind today’s sell-off is the U.S. debt impasse. Apparently, a supercommittee assigned to cut U.S. deficit has failed to reach any agreement two days before the deadline. If the committee fails to reach an agreement by Wednesday, automatic spending cuts of $1.2 trillion over ten years will be triggered, starting January 2013.


The spending cuts could slowdown the U.S. economy, which is just recovering from a severe recession. A slowdown in the U.S. could be disastrous for the global economy, considering that the euro zone is likely to enter into a recession next year. The worries have dragged down all three major indexes in the U.S. down sharply.

Commenting on gold’s drop due to the turmoil in equity markets, Adrian Day, President of Adrian Day Asset Management, told CNBC that every time there is sudden sell-off in equity markets, people have to raise money where they can, and gold is the most liquid asset.

At last check, spot gold was trading 3.1% lower at $1,671.49 an ounce after falling almost 3% last week. Gold futures for delivery in December on the Comex division of the New York Mercantile Exchange dropped $46.50 to settle at $1,678.60 an ounce.

Gold ETFs also fell today, with the Market Vectors ETF Trust (NYSE: GDX) falling 1.51% to $56.20, and the SPDR Gold Trust (ETF) (NYSE: GLD) falling 2.46% to $163.50. The iShares Gold Trust (ETF) (NYSE: IAU), meanwhile, finished 2.44% lower at $16.41.

Silver prices also fell sharply today. Spot silver fell 4.3% to $30.99 an ounce today. Platinum dropped 3.2% to $1,536.74, while palladium dropped 3.1% to $582.97.

Apart from worries about the U.S. deficit stalemate, global markets were also dragged lower by worries about the ongoing debt crisis in the euro zone.

Over the weekend, Spain, one of the troubled euro zone economies, saw the People’s Party win the general election, sweeping away the riling Socialists. The new government in Spain is expected to implement tougher austerity measures. If the new government in Spain comes up with a credible plan to bring down fiscal deficit and also tackle the country’s unemployment, yields on Spanish bonds could retreat. But implementing tough austerity measures and boosting job growth at the same time will be a difficult task for the new government. And with the bond markets moving quickly, time is running out for Spain.

Meanwhile, Moody’s today warned that rising bond yields and increased fiscal challenges could lead to negative credit implications for France, euro zone’s second largest economy. Last week, French bond yields, along with Italy and Spanish bond yields, rose to a euro-era high. The crisis in the euro zone has moved from periphery to the core and this is a major concern for investors.

The stalemate over slashing the budget deficit in the U.S. and the debt crisis in euro zone could lead to further sell-off in global equity markets, and this in turn, could push gold prices even lower as investors sell the precious metal to cover their losses elsewhere.

However, St. Barbara Ltd., an Australian gold producer, expects gold prices to remain strong. Tim Lehany, CEO of St. Barbara said an interview with Australian Broadcasting Corp.’s Inside Business program that the consensus seems to be that gold prices will remain strong for some time. However, Lehany added that there will be a lot of short-term volatility.

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edliston
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.


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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.

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