Gold Steadies Following Moody’s Downgrades

Posted on: February 14, 2012

Gold prices reclaimed $1,720 an ounce Tuesday as the euro reversed early losses on stronger-than-expected German economic data. The euro, and consequently gold, had come under pressure in early trading as investors bought the U.S. dollar following a ratings cut of six European nations. Spain, Italy, Portugal, Slovakia, Slovenia and Malta all had their ratings lowered by Moody’s Investors Service on Monday. In addition, Moody’s announced it may strip the U.K. and France of their AAA ratings.

Investors are also focused on Greece’s debt woes today, as traders nervously await the outcome of Wednesday’s European Union finance ministers’ meeting, where politicians will discuss Greece’s 130 billion euro bailout. Greece’s parliament adopted fresh austerity measures this week to secure its next round of bailout funds; however, the country still must provide Eurozone finance ministers details of how it will fill a 325 million euro gap in its plan for an extra 3.3 billion euros in savings this year.

While gold has come under pressure as the U.S. dollar benefited from turbulence in Europe, analysts say any sell-off will be limited as investors use market corrections to buy the dip. “A fall in price is unlikely,” said Commerzbank, “since it would appear that there is brisk interest in buying gold at around the $1,700 a troy ounce level.”

Some analysts said further turbulence in Europe will also likely spur buying as investors seek safe stores of value. “As the debt crisis continues to accelerate in Europe, gold will be viewed as a safe haven as the fear of contagion grips the markets,” Jeffrey Sica, president and chief investment officer of U.S.-based SICA Wealth Management, said. “As investors lose faith in governments’ abilities to handle deficits, they will turn to gold due to it having the psychological value of stability and certainty.”

Fresh economic data out of the U.S. might be another possible driver for higher gold prices this week according to The Street. If data is better-than-expected, it could trigger a flight out of the U.S. dollar and into riskier assets. In turn, gold would benefit from the weaker dollar.

James Steel, analyst at HSBC, also said President Obama’s unveiling of his fiscal budget could provide support for gold. The U.S. budget deficit is expected to grow by more than $1 trillion for a fourth consecutive year under the President’s plan. “The debt-to-GDP ratio is projected to continue to rise, at least in the short term,” said Steel to The Street. “Gold tends to appreciate rapidly once US debt-to-GDP levels move sharply higher.”