Gold Misses Out on Risk Aversion Trades

By FX Empire Analyst - Barry Norman
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Gold Misses Out on Risk Aversion Trades

Gold Misses Out on Risk Aversion Trades

Gold futures closed on a flat note, as renewed fears about worsening euro zone debt crisis along with a wider concern about the global economy dampened the metal's value as a traditional inflation hedge. Profit taking and chart consolidation were featured Wednesday. As gold and silver traders await some significant, fresh fundamental news to give them near-term price direction, a stronger U.S. dollar index this week has limited buying interest in the metals. Gold last traded up $0.30 at $1,765.30 an ounce. Spot gold was last quoted down $0.20 at $1,764.25.

Spot gold was slightly weaker yesterday as gloom over the euro zone's debt crisis supported the dollar, weighing on bullion. Standard & Poor's on Wednesday cut Spain's sovereign credit rating to BBB-minus, just above junk territory, citing a deepening economic recession that is limiting the government's policy options to arrest the slide. The International Monetary Fund urged European policymakers to deepen the financial and fiscal ties within the euro area with some urgency to restore sagging confidence in the global financial system. Fitch Ratings cautioned that euro-zone members could face more credit downgrades.

This morning some recovery was seen. In early trading gold has moved up 5.00 to trade at 1770.65. Bargain hunters returned to the physical market, after gold retreated about $30 from an 11-month high hit last week.

 Holdings of gold-backed exchange traded funds continued to climb, rising to a record high of 74.76 million ounces by Oct.8.Gold holdings of SPDR gold trust, the largest ETF backed by the precious metal, increased to 1,340.52 tons, as on Oct. 9. Silver holdings of iShares silver trust, the largest ETF backed by the metal, declined to 9,920.18 tons, as on Oct, 2.

The US dollar extended its decline on Wednesday after the Federal Reserve said in its Beige Book report that US economy “expanded modestly” in late August and September. IMF said that, if euro-zone governments fail to resolve the crisis, banks there could be forced to unload more assets than previously thought.

IMF said the euro area's debt crisis was the main threat to growth, and the risks to global financial stability had risen in the last 6-months, leaving confidence "very fragile."

G7 Leaders and Finance Ministers are currently meeting in Tokyo to discuss the global growth and financial situation. News from the meetings could affect gold trading. There are also side meetings scheduled with Japanese leaders and ministers to discuss the strength of the yen and the ailing Japanese economy.

Risk aversion is once again the theme of the markets, but safe haven trading has shifted from gold to the USD weakening gold. 

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