News that Dubai World is postponing payments on $59 billion of debt that it used to finance its construction boom sent gold down as much as $52 to $1,138 per ounce in overnight trading. The price of gold recovered much of the loss during the holiday shortened trading session, as market participants continued the recent trend of buying the dips. Gold recovered to levels above $1,170 per ounce, but still marked its worst decline in over a month.
The US Dollar index, despite reaching a high of 75.655, gave up a considerable portion of its gains and closed higher by only 0.25 to 75.04. The move in the US dollar sent the price of crude oil lower as well, as it closed down 2.6% at $75.93 after reaching an overnight low of $72.39 per barrel. In keeping with the trend, equity markets, as measured the S&P 500, closed down 1.7%to 1,091.49, after falling to as low as 1083.74 in morning trading.
Even as risky asset classes, particularly stocks and commodities, closed well above their intraday lows, it nevertheless appears that risk aversion has returned to the marketplace. This change is trend is evident by the 21% increase in the CBOE Volatility Index (VIX) to 24.75, just one trading day after hitting 20.05, a 15-month low. Given the strength and resiliency of financial markets over the past several months, many investors appear to have been expecting a continuation of the recent upward trend into year-end, a seasonally bullish time for equity prices and other asset classes. However, the unexpected news out of Dubai brought back memories of 2008, when investors woke up to credit-related issues and declining stock futures on a daily basis.
Whether Dubai’s default is an isolated issue or whether it morphs into a more systemically important development remains to be seen. The performance of the counter-cyclical gold price and gold mining sector will be closely monitored amidst potential new credit and debt-related concerns. If the current downturn in equities and commodities intensifies, the possibility of indiscriminate selling, such as that which occurred in the fall of 2008, remains a risk. From a longer-term perspective, the re-emergence of credit-related issues that causes central bankers and policymakers to continue supporting the global economy through crisis-driven monetary and fiscal policies should provide further fuel for the degradation of fiat currencies and for significantly higher gold prices in coming years.
Gold Price News provided by GoldAlert.