Gold prices cap gains after Spain and Italy see downgrades

8 October 2011 8 October 2011

BonTrade

Gold prices capped recent gains in trading on Thursday after Fitch downgraded the credit ratings of Spain and Italy, prompting traders and investors to sell gold in a bid to raise cash to cover margin calls.

The concerns about Europe reignited on Friday after ratings agency Fitch downgraded Italian and Spanish debt to A+ and AA-, respectively. That took the stock market and gold prices off their earlier highs.

For the week, gold prices gained around 0.7 percent, its first weekly gain in five weeks. Stronger physical demand boosted gold after the precious metal fell 20 percent from its record of $1,920.30 in early September.

Bottom for Gold Prices?

“When people need money to answer margin calls, gold is susceptible to liquidity bids from other markets. I don’t know if we have seen the bottom put in for gold after this week’s reversal.” said Jeffrey Sherman, commodities portfolio manager at DoubleLine Capital.

However, concerns over Europe could continue to give gold prices support next week as worries about the sovereign debt crisis remain at the forefront.

Gold’s safe haven status could attract buying if those worries reignite; but not all precious metals market watchers are completely convinced that growing economic worries concerning Europe will automatically be bullish for gold prices.

Market watchers and analysts said if the sovereign debt issue leads to another recession in Europe, then that could be deflationary, which means gold’s role as an inflation hedge is somewhat diminished.

Gold Price Forecast – Morgan Stanley

Basing the forecast on the belief that the global economy will slow down and prompt investors to seek haven assets for wealth storage, analysts with Morgan Stanley issued the belief that gold will soar to prices of $2,200 per troy ounce while touching values as high as $2,464 per troy ounce.

The report penned by Morgan Stanley Hussein Allidina and peers notes bullion has consistently performed strongly when under the pressure of recessions past.

With an all time record gold price of $1,923.70 per troy ounce set exactly one month ago, gold has climbed in value this year mainly because of the sovereign debt problems that have been hanging over European countries that include Greece, Portugal, Ireland, Spain and Italy.

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