Gold Prices And Stock Markets Weaken But Dollar Gains

Disappointing corporate earnings and weaker-than-expected existing home sales late in the week kept risk on the defensive with stocks paring nearly the entire week’s gains as haven flows kept the US dollar well supported.

Gold prices are still suffering from long liquidation as traders lock in profits from the $250 move we have had since August. There is a clear lack of momentum in gold prices at the moment. There is a complete absence of a convincing reason for gold prices to rally for the short-term till the first week of November, especially if forthcoming economic data continue to be positive. Some fresh technical selling has emerged as both silver and gold prices have hit six-week lows but the correction is likely to be a temporary pause in a wider upward trend.

Comex Gold prices for the December contract slid from the day’s high of $1744.7 to $1716 but closed at $1724, above the support of $1720. Gold traded in India on the Multi Commodity Exchange and saw prices sliding less in comparison on the back of a weak INR which tumbled around 1.25% yesterday against the US dollar. MCX Gold prices for the December contracts slumped to Rs. 31,212 from the days high of Rs. 31,438.

Gold traders waited for fresh impetus from leaders at the EU Summit. German Chancellor Angela Merkel raised new hurdles on Friday to using the eurozone rescue fund to inject capital directly into ailing banks from next year, dashing Spain’s hopes of soon removing the cost from its national debt. Merkel prepped markets, stating that she expects no decisions to be taken this week as policy makers lay the ground work for the December meeting where they will discuss steps towards further economic, monetary and financial integration among the member states.

U.S. existing home sales fell in September but in line with expectations, industry data revealed on Friday. In a report, the National Association of Realtors said that home sales fell 1.7% to 4.75 million from 4.83 million in August, whose figure was revised up from 4.82 million. Analysts had expected existing home sales to fall to 4.75 million last month. While in line with expectations, the report stoked bearish sentiments on Wall Street and sent investors chasing the dollar, ditching higher-yielding currencies and gold in the process.

Stock Markets Weaken Gold Prices:
Unexpectedly weak results from Google dragged down equities on Friday, while the euro fell against the US dollar, hurt by a perceived lack of progress on a Spanish bailout request. That weighed heavily on gold prices, which become more expensive for holders of other currencies when the US dollar firms. The Google results were followed by other major U.S. companies, General Electric to McDonald’s Corp. and Microsoft Corp. reporting disappointing earnings results on Friday added pressure on world stock markets.

The S&P 500 slipped for a second day after rallying 2.3% over the previous three sessions. With three weeks to go before the U.S. Presidential election there’s a bit of hesitancy to keep bets open. Markets are largely in a "wait and see" mode at the moment, with elections in the United States and the transition of power in China happening early November. Given the importance of China and the US in the global economy, we might not see strong positioning taking place in the next few weeks.

Gold Prices lose support of South African Mining Strikes:
Some South African mining unions have begun moving toward labor agreements and the South African rand is slightly firmer as a result. Gold Fields, the world’s fourth largest gold bullion producer, said on Friday that the striking workers at its KDC West mine in South Africa have returned to work, ending a month-long strike at the operation. About 1,500 employees who did not report for work before Thursday’s deadline were dismissed, but had until noon on Friday to appeal against their dismissal.

Number three platinum producer’s, Lonmin also said its operations in South Africa were back to normal after about 4,000 employees walked out a day earlier. A wave of strikes has hit the South African mining sector since unrest at Lonmin’s Marikana mine led to the police killing of 34 miners on August 16, the bloodiest such incident since the end of apartheid in 1994. Platinum prices have risen nearly 20 percent since the violence broke out, but remain constrained by a dire demand picture, particularly from the key European automotive sector.

US Dollar’s Rise against Euro Weakens Gold Prices:
The US dollar is stronger in the absence of any meaningful data or progress on Greece or Spain at a European Union summit. The US dollar rose against the euro and the yen on Friday weakening gold prices in return, with the euro slipping from the top of its recent trading range as a perceived lack of progress on a Spanish bailout request reminded investors of the headwinds facing the global economy.

Expectations Spain will ask for a bailout helped the euro rally to a one-month high this week but uncertainty about when such a request might come has made investors wary of driving the eurozone common currency much higher. A bailout request from Spain would enable the European Central Bank to buy Spanish bonds and drive down Madrid’s borrowing costs.

That would probably increase investor appetite for perceived riskier currencies against the safe-haven US dollar, such as the euro and thereby trigger a rally in gold prices. A report showing U.S. existing home resales fell in September, a reminder that America’s housing sector is a long way from a full recovery, weighed on the euro in the New York session and helped bolster the U.S. currency against the yen.

The EUR/USD is still trading within the 1.2800 to 1.3160 range and I believe will continue to do so until after the U.S. election. Speculators have recently sold the yen on expectations the Bank of Japan will take another easing step at its policy meeting on October 30, following up on its easing last month. However, the dollar’s rise is likely to slow as Japanese exporters are waiting to sell, and immediate resistance is seen at its August peak.

Gold Prices Range bound till New Effective Triggers are seen:
Gold traders now look ahead to next week and movements in gold prices will be taking cues from the FOMC interest rate decision on Wednesday and Q3 GDP data on Friday. It is highly unlikely for the Fed to change its QE3 decision in the October 2 day FOMC meeting, which concludes Wednesday. Although the central bank is not expected to alter its policy stance, investors will be closely eyeing the accompanying statement for an updated assessment of the domestic economy.

If the Fed adds concerns about inflation and rising prices, gold prices will remain well supported as investors flock into gold bullion as a traditional hedge against inflationary pressures. The Fed may also keep focus on what to do when Operation Twist ends in December.

Other key events to watch will be the results of the Chinese Economy PMI, set for release Tuesday, and European Central Bank President Mario Draghi’s speech to the German parliament on Wednesday. Copper traders who a week ago were the most bearish in four months are now the most bullish in a year after economic reports signaled accelerating growth from China to the US.

Natural gas touched a 10-month high in New York on speculation that above-normal demand from electricity generators will help in reducing a supply surplus. Natural Gas rose as much as 1.7% after an Energy Department report showed inventories expanded by 51 billion cubic feet, less than the five-year average gain of 71 billion for the week.