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2011-09-20 08:12:50
Gold rises as correlation with equities erodes
By Amanda Cooper
LONDON, Sept 20 (Reuters) - Gold rose on Tuesday, after Standard and Poor's
downgraded Italy's credit rating, adding to the strain on the debt-distressed
euro zone, while uncertainty over the outcome of a key U.S. Federal Reserve
meeting also helped buoy the market.
In the latest blow to the euro zone, S&P cut Italy's sovereign credit rating by
one notch, saying its economic growth prospects were getting weaker and planned
reforms by the government would not help much.
A measure of German analyst and investor sentiment fell to its lowest in nearly
three years last month, adding to the pressure on policymakers to stem the
crisis, while markets attached a growing chance to Greece defaulting on its
debt obligations.
Gold shrugged off a rise in European stocks, which would normally reflect a
pick-up in investor appetite for risk. But the rise on the stock market was led
mostly by so-called defensive shares, which act almost as safe-havens.
Also, gold's usual inverse correlation with the European equity market has
eroded over the last month, reaching its least negative since mid-August, which
means it is more likely to move in tandem with stocks.
Spot gold was last up by 0.9 percent at $1,793.90 an ounce by 0957 GMT, having
fallen by nearly 1 percent so far this week, in its third consecutive weekly
decline.
"Increasingly over last couple of weeks, we've seen stories about how safe
something is that is as volatile and that is doing a bit of damage here and has
caused a few people to pull out and go on the sidelines," said Saxo Bank senior
manager Ole Hansen.
"The $1,765/70 area is reasonable support and that is giving a bit of
confidence back to the buyers. But we really have been in a downtrend for the
best part of the last couple of weeks and that needs to be broken ... and for
that, we need to move back above back above $1,825," he said.
The volatility in gold prices in the past few weeks has indeed deterred some
gold investors, as evidenced by the decline in speculative holdings of U.S.
gold futures <0#CFTC:> and a fall of nearly 2 million ounces in holdings of the
metal in exchange-traded funds over the last month.
Bank of China , a big market-maker in China's onshore foreign exchange market,
has stopped foreign exchange forwards and swaps trading with several European
banks due to the unfolding debt crisis in Europe, causing some distress in
market sentiment.
HOLDING STEADY
Gold is likely to hold steady over the coming day or so as investors await the
outcome of the Fed's two-day policy meeting, at which the central bank is
widely expected to signal what action it will take to encourage economic
growth.
While markets are discounting a return to government bond purchases, the Fed
has more tools at its disposal to boost consumer spending by keeping interest
rates low, which create a supportive environment for gold, which carries no
yield of its own and loses out to other dividend- or yield-bearing assets when
rates rise.
Spot gold has lost more than 2 percent so far this month and 7 percent from the
record high of above $1,920 hit on Sept. 6, but it is still up by more than a
quarter from the end of 2010.
The high degree of uncertainty is expected to remain a major source of support
for gold, according to participants at an industry gathering in Montreal this
week.
Gold demand in China, the world's largest gold producer and second-biggest
consumer, could rise 10 percent this year as consumers choose the metal as a
form of wealth protection, the World Gold Council said on Monday.
In other precious metals, spot silver lost 0.8 percent to $39.38, but off the
three-week low of $38.95 hit in the previous session.
Platinum rose by 0.3 percent to trade at $1,775.65 an ounce, while palladium
rose 0.6 percent to $716.22. (Additional reporting by Rujun Shen in Singapore;
Editing by Alison Birrane)