Gold Rally begins to stall after 4 day rally: investors become cautious

by Dagmark Garcia | Wednesday, Apr 11, 2012 | 465 views

Gold prices fell slightly on Wednesday after a four-day-rally due to a cloudy economic outlook caused by the recent disappointing data. Gold is seen as a safe investment when economic outlooks are gloomy.

Optimism about the recovery of the U.S. economy was cut short after disappointing employment figures last week. This caused investors to question the economic outlook of the world’s biggest economy, encouraging investors to put their money into gold.

Spot gold fell 0.2 percent to $1,656.96 per ounce, after hitting a one-week high of $1,662.60 on Tuesday. U.S. gold lost 0.1 percent to $1,658.50.

Gold, the U.S. dollar, and U.S. government debt have all seen increases in investment due to fears caused by the U.S. economic outlook. U.S. treasury yields hit four-week lows due to the increase.

The prospect of monetary easing from the U.S. government is also seen as a sign that investors should turn to gold. Inflation is typically seen as going hand in hand with monetary easing. In turn, gold is seen as a hedge against inflation.

“If weak data continues, the Fed will have to intervene again to stimulate consumption,” said Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong.

Investors will also be watching the eurozone closely as an indicator for the purchase of gold. The recent weak bond auctions in Spain may encourage investments in gold.

China, the world’s largest gold consumer, has seen a steady demand for gold and is not expected to see any changes in demand.

“On the public level, China’s central bank will continue to accumulate gold, which is easier than liberalizing their capital account and currency,” said Friesen of SocGen, he also added that building gold reserves would help China’s push to turn the renminbi into a global currency.

 

The price of gold will largely rely on the earnings reports and other data that will shed more light on the mixed results pertaining to the state of the United States economy. Alcoa, a flagship company for the materials industry has already reported strong earnings for the first quarter – a possible sign of strong U.S. and global economic prospects.

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