Gold found support just below $1,100 after Thursday’s heavy selling, bouncing back in trading this morning in Europe. The 3-month futures were last changing hands at $1,106.5. Yesterday’s decline was largely forced by a strengthening dollar, as both the Euro and Sterling weakened following negative economic reports.
In the UK the British pound fell after the office for national statistics revealed an unexpected 0.3% drop in retail sales in November against expectations of a 0.5% increase.
Meanwhile in the Eurozone, a second downgrade to the Greek economy saw Standard and Poor rerate its government bonds to triple B. The Mediterranean government’s bonds are now just holding onto the lower fringes of the investment grade category. The latest downgrade has pressured the Euro with fears growing over the potential for further downgrades, which may lead to a collapse of its banking system should its debt become unsuitable for ECB collateral requirements.
This morning on London’s Intercontinental Exchange (ICE) the dollar index has eased slightly from Thursday’s highs, alleviating some of the strain on the yellow metal. The index represents the greenback’s relative strength compared with a basket of the six major global currencies (Yen, Euro, Sterling, Canadian Dollar, Swedish Krona and Swiss Franc).
Gold’s rise from $750/ounce a year ago was driven primarily by growing fears over inflation and specifically the decline of the US Dollar. The greenback's decline has increased the relative appeal of physical assets, particularly gold, to protect against further devaluation.
Gold and the US Dollar have a directly inverse relationship; typically a fall in the dollar will prompt an increase in value for gold and vice-versa. Like all major commodities gold is primarily priced in dollars, therefore a change in relative value of the dollar directly impacts on the commodities relative value. Crucially, when the dollar is weak, international dollar reserves devalue, subsequently central banks increase their demand for alternative assets such as gold.
Among the other precious metals, Silver futures climbed almost 1% in electronic trading, while similarly Platinum futures were rising between 0.75% and 1% on Globex.
On the London Stock Exchange, major precious metal producers have been stronger this morning, South African based gold miner Randgold Resources (LSE: RRS) advanced strongly gaining 2.5%, although moving in the other direction Petropavlovsk (LSE: POG) fell 1%.
Elsewhere silver producer Hochschild Mining (LSE: HOC) was also particularly strong, climbing almost 3%. The FTSE250 miner also announced it had increased its shareholding in US based gold junior, Gold Resource Corp (OTC: GORO).
Aquarius Platinum (LSE: AQP) gained nearly 1%, while the world’s largest primary silver miner, Fresnillo (LSE: FRES), rose marginally.
In a fairly quiet day among juniors, Archipelago Resources (AIM: AR.) was one of the few AIM listed gold stock to trade higher, advancing 3.5%, Persian Gold (AIM PNG) followed rising 2.5%.