New York 23/11/2011 - Gold on the Comex division of the New York Mercantile Exchange shunned its safe-haven status on Wednesday, with investors fearing that the spread of the eurozone debt crisis into stalwarts France and Germany would constrict global liquidity.
Gold futures for December delivery were last down $22.20 or 1.3 percent at $1,680.20 per ounce in New York. Trade has ranged from $1,680.20 to $1,710.80.
In Europe, an unexpectedly weak auction of German government bonds could indicate that the credit crisis has leaked into the strongest member of the 17-nation currency union.
Germany was only able to sell 3.644 billion euros of a 6-billion-euro 10-year bund offering that was priced at a 1.98-percent yield.
In France, Fitch Ratings said that the increase in government debt has largely exhausted the fiscal space to absorb further adverse shocks without undermining the country's AAA status.
“These two pieces [of news] are part of the same story. France and Germany won't be able to underwrite the rest of Europe's debt forever,” a US-based gold trader said.
“Why would investors buy German debt at two percent when they know that Berlin is on the hook for Italy and Spain at seven percent for as long as the euro exists?” the trader added.
A central cog of gold's bull story is that the ECB, the IMF and other central banks will have pump massive amounts of cash into the markets to support the region's struggling countries. This massive liquidity would debase paper currencies and push investors into the relative safety of precious metals.
“But, at the end of the day, that money is going to come from Germany and France and maybe China at some point. If the Germans were to lose access to cheap debt, that would prove to be a big negative for gold,” the trader said.
“That's why today is a liquidation day with people selling everything that isn't nailed down. The only real safety net is the dollar,” he added.
The debt anxiety in Europe pushed the euro down nearly two cents to 1.3334 against the dollar. Equities were lower, with the Dow Jones industrial average and S&P 500 off 1.64 percent and 1.81 percent respectively.
In other macroeconomic data, Germany's PMI came in worse than expected at 47.9 against a forecast of 46.6. Any number below 50 indicates that the economic activity is contracting.
“This is keeping the euro on the back foot - this strong dollar environment continues to make it extremely difficult for commodities to make any solid gains,” Standard Bank said in a note.
In the US, initial jobless claims for last week at 393,000 were slightly disappointing - they were expected to come in at 389,000 - but they were still below the crucial 400,000 level.
Meanwhile, October durable goods orders fell to -0.7 percent but this reading was better than the predicted 1.1-percent drop. Personal income, which has been trending lower since April, showed a rebound to 0.4 percent last month, while consumer spending came in worse than expected at 0.1 percent from 0.4 percent and compared to the previous 0.6 percent.
In China, the November HSBC flash Chinese Manufacturing PMI was reported at 48.0 from 51.0 previously, which is the lowest level since March 2009.
(Additional reporting by Clara Denina, editing by Mark Shaw)