Gold and silver fall with easing Europe banking worries

July 15, 2014

Gold prices have fallen for a second day, as it became apparent that the financial problems at a Portuguese lender are unlikely to be a threat to Europe's wider banking system, lessening the need to use the precious metal as a safe haven against economic turmoil.

Gold for August delivery, the most actively traded contract, on Tuesday closed down $US9.60, or 0.7 per cent, at $US1297.10 a troy ounce on the Comex division of the New York Mercantile Exchange. The decline follows a more than two per cent retreat Monday, gold's sharpest drop in seven months.

Portuguese Banking conglomerate Espirito Santo delayed repayments on some short-term debt securities last week, leading some investors to worry about the health of Europe's financial system.

The concerns pushed some investors to buy gold, sending the precious metal to its highest level in nearly four months. Some market participants use gold as a hedge against economic or political uncertainty, believing it will hold its value as other assets fall.

Now, investors appear to have decided the troubles at the Portuguese bank may be less of a threat to Europe's banking system than previously believed.

"We had a flight to quality last week, and when the situation didn't turn out to be that serious, investors just pulled the plug," said Frank Lesh, a broker at Future Path Trading.

"We closed below $US1300 an ounce, which of course hurts, psychologically."

Senate testimony from Federal Reserve chair Janet Yellen also weighed on gold prices.

Yellen said interest rates would climb faster than the market expects if US data continue to improve. Still, the Fed chief also said the reverse would happen if economic performance is disappointing.

"The Fed delivered essentially the same message as before, but now investors are interpreting it to mean that rate hikes could come sooner than expected," said George Gero, a senior vice president with RBC Capital Market Global Futures.

Higher interest rates would hurt gold, which pays nothing and struggles to compete with investments that offer yield.

In other markets, silver fell 0.1 per cent to $US20.889 a troy ounce in the most actively traded September futures contract. Gold and silver often move in the same direction, as some investors view silver as gold's cheaper cousin and purchase it as both a currency alternative and a store of value.

Source: WAToday

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