The price of gold fell $23.30, to close the day at $1,131.25 per ounce. Investors continued to sell investments related to the price of gold as the US Dollar gained strength. Gold mining stocks were sold aggressively, evidenced by the 4% decline in the Market Vectors Gold Mining ETF (GDX) and the 2.7% decline in Canada’s S&P/TSX Global Gold Index. Both indices declined for the fourth straight day as the U.S. Dollar reached its highest level in over a month as measured by the Dollar Index (DXY).
The rise in the dollar came as Fitch Ratings reduced Greece’s sovereign debt rating one notch to BBB+ and moved its outlook to negative. This move comes just one day after Standard & Poors placed the sovereign debt of Greece on watch for a potential downgrade – stemming from concern that the European nation may have difficulty repaying various debt commitments. Greek stocks and government bonds fell significantly on the news, with two-year note yields having their largest one day advance since August of 1998. As risks have risen in foreign markets, investors have sought the relative safety of U.S. government bonds and the world’s reserve currency, the U.S. dollar, leading to declines in the dollar-denominated gold price and virtually the entire commodities complex.
Adding further pressure to the price of gold were comments from the head of the Bank of Korea’s reserve-management department, Lee Eung Baek, “There’s an illusion in gold. We follow the big trend. Gold isn’t the trend. Out of more than 200 nations, how many countries have bought bullion?” He went on to say, “Like other central banks, we have been increasing the types of currencies consisting of the reserves outside the dollar,” and commented that gold “offers little value,” with “no cash returns.”
Given that South Korea has the fifty-sixth largest holdings of gold reserves in the world at $270.9 billion as of November 2009, there was speculation that it may follow in the footsteps of India, Mauritius, and Sri Lanka by purchasing gold from the IMF and further diversifying its foreign exchange reserves. Commenting on this speculation, Mr. Baek stated that “Since India and Russia with large reserves bought gold, there’s speculation that Korea might buy it too. But we are not classified in the same category. There’s a slim chance that we will buy gold” from the IMF. He added that “The volatility on gold is too big. And once gold is purchased, it’s just kept in a safe and is not put up for sale even if prices rise.”
Reflation beneficiaries, led by the gold price, were punished today with basic materials equities being the worst performing sector after the gold mining stocks. How violent the unwinding of the dollar carry trade becomes is being hotly debated as longer-term macro fundamentals clash with shorter-term trading adjustments.
Gold Price News provided by GoldAlert.