Euro bounces back and gold slides but, the long term trend in gold remains very much intact

Euro bounces back and gold slides but, the long term trend in gold remains very much intact

The price of gold has breached its 50 day moving average but sideways action is likely as sovereign debt remains an issue

Author: David Levenstein
Posted:  Monday , 05 Jul 2010

JOHANNESBURG - 

Last week the Euro surged on the back of a massive wave of short covering on the first trading day of July and a day before US employment data was released. This action in the euro was predominantly sparked by the news that the ECB is going to grant 78 banks EUR 111.2 billion of funds for six days to assist them with the expiry of its 12-month loans in which banks needed to repay 442 billion euros worth of debt by July 01. As the euro rallied, the gold price dropped below EUR 1000/oz for the first time since June 17.

This rebound in the euro was hardly the reason for the price of the yellow metal to drop from $1,262/oz on Monday to its low of $1198/oz on Thursday. Also, I doubt that this rally is a reversal in trend for the euro, especially when the issue of sovereign debt and massive budget deficits still remain very much in focus. One of the problems is going to be the ability of countries in the Eurozone to raise finance. Spain's recent 3.5 billion euro auction drew weak demand (1.7 times the offer) and a higher yield (cost for the governme nt). With weak GDP growth, high unemployment, high national debt and high budget deficits, the future of the euro does not look very promising. And, investors worried about this scenario will continue to do the prudent thing and diversify some of their assets into gold.