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Gold prices rebound after sharp sell-off

December 1st, 2014

120114_gold By Graeme Ballard, eSignal and Advanced GET Trading Specialist

The price of gold recovered on Monday, Dec. 1, after suffering sharp declines previously in the trading session.

Gold nears $1,140/oz early in trading
Spot gold fell to as little as $1,142.91 an ounce, the least since November, before recovering slightly to hit $1,151.61 per ounce by 05:55 GMT, according to Reuters. At this time, the contract was down 1.3 percent for the day.

Precious metal recovers
By 14:40 GMT, spot gold had risen to $1,194.98 an ounce, 2.4 percent higher for the session, Reuters reported. December contracts for the precious metal were $18.20 per ounce higher at $1,193.70.

Swiss voters reject proposal
The precious metal enjoyed a sharp recovery after market participants arrived at the conclusion that the market reaction to Swiss voters’ rejection of a proposal that could impact the precious metal was overdone, according to the media outlet.

During the weekend, voters in Switzerland turned down a proposal that would have required the nation’s central bank to boost the financial institution’s gold holdings to 20 percent of all assets, The Wall Street Journal reported.

Swiss television stated that approximately 78 percent of the nation’s voters were against this proposal, which would have undermined the ability of the country’s central bank to engage in monetary policy, according to the news source. As a result of this risk, many industry participants have voiced their concerns about the initiative.

During the last three years, Switzerland’s central bank has helped to protect the nation’s exports by buying substantial amounts of the euro and therefore ensuring the franc and common currency maintain a certain exchange rate.

Vote spurs speculation
As a result of the move made by voters, market participants have started speculating that other central banks will not bolster their holdings of gold as much as previously thought, David Lennox, a resources analyst at equity research Fat Prophets, told CNBC.

He emphasized that market participants are reacting this way even though many expected Swiss voters to act the way they did, and the nation’s central bank is not a major buyer of the precious metal, the media outlet reported.

Gold’s recent losses
If this speculation is accurate, it could cause further problems for gold, which has already suffered substantial losses over the last few years. The commodity surged to more than $1,900 per ounce in 2011, but quickly started moving lower.

By the time April 2013 rolled around, the precious metal had lost more than 20 percent from this high, entering a bear market as a result. The commodity continued to extend these losses, dipping below $1,200 per ounce in June, and hitting its lowest in almost three years.

After falling to that point, gold managed to stage a recovery, climbing higher and hitting a bull market in August. Even after this improvement, the precious metal still suffered sharp declines for the year, losing nearly 30 percent in 2013.

Impact of oil
While nobody knows where the precious metal will go next, one factor that could easily affect future price movements is the value of oil. When this energy source, which is used in creating a wide range of goods, rises in price, it tends to push other commodity prices higher. Alternatively, if oil depreciates, it frequently helps drag down the value of other raw materials.

While crude futures trading in New York recently dropped to a five-year low, these contracts managed to surge as much as 2.3 percent on Dec. 1, according to Bloomberg. Tai Wong, who works for BMO Capital Markets Corp. in New York as the director of commodity products trading, spoke to the situation.

“What’s driving the gold market here is crude,” Wong told the news source. “The move is snowballing as recent short covering and micro-term momentum buyers go long.”

Inflation’s effect
There is more than one way that oil prices could impact gold, as low energy costs could help put downward pressure on consumer prices in the short-term, Federal Reserve officials could warn, according to the media outlet.

If the prices paid by consumers rise slowly, this development could easily help put downward pressure on gold prices. When inflation is high, many people flock to the precious metal as a hedge, based on the mindset that if the economy suffered hyperinflation, market participants would still be able to use gold as a currency.

Market participants interested in gold futures trading might benefit from learning more about the sharp fluctuations the precious metal experienced on Dec. 1, as well as the major developments that analysts cited when explaining these price movements. By learning this information, investors might be better-prepared to make well-informed decisions.

In addition, following the physical purchases made by central banks around the world – as well as consumers – could be helpful to those interested in trading gold futures.