Gold off the lows following dismal pending home sales data

[Ramon Ramirez]

Forexpros - Gold futures came off the lowest levels of the day during U.S. morning trade on Wednesday, following disappointing data on U.S. pending home sales, though lingering fears that the euro zone’s debt crisis is deepening weighed on the precious metal.

On the Comex division of the New York Mercantile Exchange, gold futures for August delivery traded at USD1,543.85 a troy ounce during early U.S. morning trade, shedding 0.45%.

It earlier fell by as much as 1.15% to trade at USD1,532.55 a troy ounce, the lowest since May 16, when prices fell to a 2012 low of USD1,526.95.

Gold futures were likely to find near-term support at USD1,526.95 a troy ounce, the low from May 16 and resistance at USD1,585.65, the high from May 28.

Gold prices found some support after the National Association of Realtors said its pending home sales index tumbled by 5.5% in April, confounding expectations for a modest 0.1% decline.

The downbeat data renewed expectations that the Federal Reserve could embark on a third round of monetary easing to boost growth in the world’s largest economy.

Gold investors will be closely watching U.S. data in the second quarter for clues as to the likelihood of a fresh round of monetary easing, which could potentially hurt the dollar and support gold.

But prices remained lower as the precious metal tracked movements in the euro. Gold tends to trade together with the euro, so any weakness in the single currency can lead investors to cash in their bullion positions to realize a higher profit in their local currency.

In addition, European investors are also more likely to sell their gold when the euro depreciates against the dollar to earn a higher profit on their currency position by taking profit on their dollar-denominated bullion position.

The single currency came under pressure from concerns over the situation in Spain, where rising bond yields, the growing costs of bank rescues and a recession hit economy fuelled fears that Madrid will be forced to seek an international bailout.

The yield on Spanish 10-year bonds climbed to 6.7% earlier Wednesday, approaching the critical 7% threshold that preceded bailouts in Greece, Ireland and Portugal.

Jitters regarding Spain have worsened in recent sessions, after Bankia, the country’s fourth-largest lender, said last week it needed EUR19 billion in state aid to shield itself from bad loans.

Meanwhile, fears over a Greek exit from the euro zone reemerged after an opinion poll showed anti-austerity party Syriza in the lead ahead of the June 17 election.

The likelihood of Greece leaving the euro has been growing since early May, when anti-bailout political parties deprived pro-austerity parties of a majority at the polls.

Also Wednesday, Italy’s Treasury auctioned EUR5.73 billion of 5-and 10-year bonds in an auction which met with lackluster investor demand, while borrowing costs rose sharply, indicating that concerns over Spain and uncertainty over the outcome of elections in Greece next month are having a negative impact on Italy.

Some market participants noted that heavy losses in stocks and other commodities markets accelerated gold’s sell-off, as traders were forced to sell their gold holdings to raise cash to cover losses elsewhere.

In October 2008, gold prices tumbled 18% as turmoil in global financial markets led to losses in global equity and commodity markets. The precious metal rallied 23% in the next two months.

Gold futures had briefly cut losses after the European Commission said the euro zone must move towards a banking union, consider eurobonds as well as the direct recapitalization of banks from its permanent bailout fund to regain investor confidence.

Elsewhere on the Comex, silver for July delivery fell 0.55% to trade at USD27.63 a troy ounce, while copper for July delivery plunged 2% to trade at USD3.393 a pound.