Spain Worries Weigh on Euro, Gold

October 1, 2012 at 07:20

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Gold drifted lower on Monday after posting its biggest quarterly rise in more than two years, tracking a weaker euro as Spain’s struggle to control its finances worried investors.

Caution has returned to the market after central banks’ stimulus measures greatly cheered gold bugs and sent bullion up for four straight months. Investors are now seeking fresh catalysts amid the still-grim picture in the euro zone.

Spain’s debt levels are set to rise next year, piling pressure on the government to apply for aid as it pours funds into cash-strapped regions, an ailing banking system and rising refinancing costs, its budget showed on Saturday.

The euro fell to its lowest in nearly three weeks on uncertainty over Spain’s bailout plan, while the dollar index .DXY rose to its highest since mid-September, making dollar-priced gold less attractive to buyers holding other currencies.

“In the short term, the weaker euro/dollar does have an impact on gold prices,” said Dominic Schnider, an analyst at UBS Wealth Management in Singapore.

“While structural change in Europe will take years, the short-term solution to the debt crisis is money-printing, which will support gold.”

Dollar-priced gold closed last week barely changed, despite a 0.8-percent rise in the dollar index, showing bullion’s resilience, he said.

A few key markets in the region, including China and Hong Kong, are closed for public holidays. China will remain closed for the rest of the week.

Equities, oil and base metals also weakened as growth worries took the centre stage, while investors await a string of purchasing managers index data from the euro zone nations and United states to better gauge the global economy, after China’s official PMI number offered more signs of a slowing economy.

Hedge funds and money managers raised their gold future positions to their most bullish in almost seven months in the week ended September 25, as investors expecting continued monetary stimulus from major central banks sought a hedge against inflation.

Holdings of gold-backed exchange-traded funds posted a small gain to 73.98 million ounces by September 29, towards a historical high of 74.288 million ounces hit last week.