Weak Euro May Restrain Dollar-Gold Rally

The moderate rise in gold prices in the first quarter was a stronger U.S. dollar benefiting from the euro's weakness. Continuing pressure on the euro will likely prevent a gold price rally during the second quarter as well.
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NEW YORK (TheStreet) - Gold Prices experienced high volatility during the first quarter of 2010 ending with slim gains over the previous quarter. Prices rose a little over 1.5% to close at $1,113.25 per ounce at the end of the first quarter of 2010 as against the closing of $1,096.95 per ounce in the fourth quarter 2009.

One of the main reasons behind the moderate rise in gold prices during the quarter was a stronger U.S. dollar benefiting from the euro's weakness. Continuing pressure on the euro will likely prevent a gold price rally during the second quarter as well, as the dollar may remain firm against major currencies with sovereign risks still persisting despite the EU and IMF agreeing to extend financial help to Greece.

Spot gold prices on the New York Mercantile Exchange are projected to reach $1,140 per ounce by the end of the second quarter and $1,185 per ounce by the end of 2010, according to analysts polled by

Bloomberg

. Currently, gold is trading around $1,156.3 on Nymex.

Dollar's Weakness in First Quarter

The U.S. economy performed well in the fourth quarter of 2009 by growing at an annual rate of 5.6%. However, the same growth is difficult to expect during the first quarter of 2010 because of a reduction in government stimulus and economic-support programs.

In addition, new home sales have not performed well since November 2009, after the government withdrew tax benefit for first-time home buyers. A high unemployment rate and exceptionally high debt levels are yet other areas of concern.

These economic signs leading to a possible lower GDP growth rate during the first quarter of 2010 raised questions on the dollar's strength.

After rising to a record high of $1,226per ounce on Dec. 3, 2009, gold prices retreated to $1,044 per ounce during the first quarter of 2010. However, the dollar weakened further on the back of falling payrolls early January, thereby pushing up gold prices to $1,163 per ounce

The historically negative link between gold prices and the dollar index was broken occasionally during the quarter when safe haven demand emerged for the yellow metal, although it seems to have hardly helped gold prices.

Sovereign Debt Concerns in Europe

The European Union barely grew in the fourth quarter of 2009 and may see only a modest recovery during the first quarter of 2010 as debt woes in Greece, Portugal, and Spain led to a financial turmoil in the region. These nations saw their fiscal deficits rising more than 12% of respective GDPs, much higher than the EU's prescribed limit of 3%.

The euro fell nearly 6% against the dollar during the first three months of 2010. In addition, the sterling pound joined the euro, declining more than 6% against the dollar, as the U.K.'s fiscal deficit crossed the 12% mark as well.

In addition, concerns regarding a hung parliament post the forthcoming general election in Britain next month have also hurt the domestic currency. As a result, the dollar had a good quarter vis-à-vis both the major European currencies.

However, gold--the traditional safe haven--seems to have gained negligibly from the concerns related to the sovereign credit risk. The dollar index gained 4.13% in the first quarter of 2010 and capped gold's upside.

As a result of the depreciation in the euro and the pound, gold priced in the two currencies marched to highs of ¿835.40 per ounce and £759.86 per ounce, respectively, on March 2. The rise in prices was more on account of the currency weakness, and not due to the performance of the metal itself.

Accordingly, even though gold touched an all-time high -- in dollar terms -- of $1,226 per ounce in early December last year, it registered record highs this year in terms of the euro and the pound.