By Debbie Carlson of Kitco News
Chicago -- (Kitco News) --Investors have developed a stronger appetite for risk as overall market sentiment begins to focus on a global economic recovery rather than a double-dip recession in the U.S., and gold is being taken off the menu.
A change in appetite for riskier assets is pressuring gold as the yellow metal falls to its lowest levels since early May on Tuesday.
A break of important technical chart support levels combined to send prices down about $25 an ounce during the U.S. session. At 15:23 NY time, spot gold is down $22.60 to $1,159.50.
For the past several days, gold was bumping along the bottom of its recent price range in the $1,180s area while other markets like base metals and equities were rallying. Several market watchers said gold’s inability to stay above the $1,200 level enticed some asset allocation out of gold. Dennis Gartman, editor of The Gartman Newsletter, and a self-described gold bull has said in recent editions, including Tuesday’s this might be the case. “The past several weeks have made it clear to us gold’s once seemingly inexorable drive higher is being replaced by strength in other markets… equities perhaps,” he wrote.
The move to riskier assets and out of more safe-haven assets is coming at a time where overall market sentiment has moved to one focusing on a global economic recovery, rather than a double-dip recession in the U.S.
Bart Melek, Global commodity strategist with BMO Capital Markets, said “it’s debatable” if this change in risk appetite will hold up, but that the results of the European bank stress tests were one of the reasons for the shift in sentiment.
Since gold rallied a few months ago on the worries of the solvency of European banks and certain southern-tier countries, Portugal, Italy, Greece and Spain, it’s not surprising to see that gold pulled back when the major banks passed stress tests. “The imminent risk is not there,” he said.
Alan Bush, senior financial futures analyst at Archer Financial said additionally, many of the recent economic reports from Europe have come in much stronger than anticipated. This is being reflected in the value of the euro currency, which has traded at a two month high against the U.S. dollar.
Mike Daly, gold specialist at PFG Best, said the sentiment change and asset allocation to other assets like stocks have weighed on gold. The break through the $1,175 area helped to speed the downside
George Gero, vice president at RBC Capital Markets Global Futures said the swift drop in futures markets open interest in July and investors exiting gold exchange-traded funds dragged down metals.
Gero said gold open interest on the Comex division of the New York Mercantile Exchange fell 9,000 after Monday’s session, which follows a loss of 50,000 contracts in one month – about a 10% drop in open interest, he said. In the ETF side, about 12 metric tons of gold has exited.
“Tomorrow could bring margin calls and crude (oil data) figures and so funds are likely to wait for better opportunities, bargain prices or other investable” sectors, Gero said.
Melek said while the world might be feeling better about Europe and the global economy, structurally governments remain saddled with debts and those aren’t going away. That ultimately benefits gold.
Bush said the longer term trend for gold futures is higher, however, as the global economy improves. “It will take a while, but eventually this will cause traders to shift their focus from the prospects of deflation to the growing prospects of inflation,” he said.
Daly said the drop in price is ultimately healthy for those bullish on gold as physical buyers can step in and get needs covered. With Indian wedding season ahead, jewelers can get some needs covered. “It might be a blessing in disguise. The market here was lacking momentum. You need bulls and bears to trade in the market,” he said.
