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Gold, silver plunge on global growth fears

Published 04/23/2012, 02:13 PM
Updated 04/23/2012, 02:14 PM

Investing.com - Gold futures plunged Monday, hitting a two-week low early in the session,  as political uncertainty in France and the Netherlands increased worries over the euro zone’s ongoing debt crisis.

On the Comex division of the New York Mercantile Exchange, gold futures for June delivery traded at USD1,636.25 a troy ounce during U.S. afternoon trade, giving back 0.39%.      

It earlier fell by as much as 1.15% to trade at USD1,623.95 a troy ounce, the lowest since April 5.

Gold futures were likely to find short-term support at USD1,613.55 a troy ounce, the low from April 4 and resistance at USD1,658.95, the high from April 16.

The precious metal’s losses started as the euro came under pressure after data showed that the euro zone's manufacturing output slumped to its lowest level since June 2009 this month, while its services sector fell to a five month low.

The decline was driven by poor performances in Germany and France, with manufacturing activity in Germany slowing to the lowest level in almost three years.

The weak data fuelled fears economic growth in the region will be hit by planned government austerity measures.

Sentiment also weakened amid fresh concerns over political uncertainty in the euro zone, as investors mulled the implications of the collapse of the Dutch government following failed budget negotiations and outcome of the first round of the French presidential election.

Adding to the gloomy trade environment, the Bank of Spain said earlier that the country’s economy shrank by 0.4% in the first three months of 2012. That follows a 0.3% contraction in the fourth quarter of 2011, and zero growth in the third quarter of last year.

There have been renewed concerns of further debt contagion in the euro zone in recent weeks amid fears Spain will be the next in the euro zone to require a bailout.

French, Dutch, Spanish and Italian government bonds fell on the news, pushing up yields. 

Although gold’s appeal as a safe haven is boosted during times of economic uncertainty, the euro zone’s debt crisis has done little to bolster appetite for the precious metal in recent months. 

A weakening euro and stronger dollar have weighed on gold instead. The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, was up 0.38% to trade at 79.58.

Gold's recent tight correlation with the euro leaves the precious metal vulnerable to a sharper pull back should the euro zone’s debt crisis worsen as prices have been tracking movements in the euro in recent weeks. 

Market analysts warned that the yellow metal could see further losses if money managers start paring their holdings of the commodity in anticipation of a worsening of Europe's financial situation.
 
Meanwhile, gold traders will closely watch a policy meeting at the Federal Reserve later this week, seeking cues on the central bank's attitude towards monetary easing. 

Expectations of monetary stimulus tend to benefit gold, as the metal is seen as a safe store of value and inflation hedge.

Elsewhere on the Comex, silver for July delivery plunged 3.03% to trade at USD30.76 a troy ounce, while copper for July delivery plunged 1.83% to trade at USD3.64 a pound.




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