The gold price has continued to fall in Asian and European trading this morning following Friday’s heavy selling which saw the yellow metal falling back below $1,200. After hitting a record high of $1,225 on Thursday, a surprise improvement in American employment caught some investors off-guard and triggered a rebound in the Dollar. The relationship between the yellow metal and the greenback has been the overriding feature in the gold market in recent months; Friday’s resurgent US Dollar has continued to pressure the gold price. This morning in electronic trading Globex gold futures fell a further $30, the December future was last changing hands at $1,140. Friday’s report from the labor department, spurred hopes that the American economy is continuing to recover, the unemployment rate improved on a month-on-month basis. Non-farm payrolls fell by 11,000 in November, a considerable and unexpected improvement from October’s decline of 111,000. The fall was the smallest drop in employment since the US fell into recession. The US unemployment rate improved to 10% from 10.2% last month. The data boosted perceptions of resilience in the economy and the dollar began to recover accordingly. The Dollar Index has return above 76pts since approaching lows of 74pts in the past few weeks, the index represents the relative strength of the greenback versus a basket of the 6 other major global currencies. Elsewhere speculators also supported the dollar. Thursday’s comments from European Central Bank (ECB) chairman Jean Claude Trichet indicated that the ECB has examined its options for scaling back and ultimately ending its stimulus measures. Subsequently some encouraged commentators have begun to speculate on the potential for the tightening of US quantitative easing (printing money). A number of analysts have pointed to the speculation, as a factor in the fairly sustained nature of the dollar rebound since the jobs report. The gold price and the US Dollar have a directly inverse relationship; typically a fall in the dollar will prompt an increase in value for gold and vice-versa. There are two primary factors that govern this relationship. Firstly like all major commodities gold is primarily priced in dollars, therefore a change in relative value of the dollar directly impacts on the commodities relative value, particularly for investors outside the US. The second and perhaps the most crucial factor relates to international reserves. All nations, through central banks, store a proportion of their wealth in a reserve, which exists to protect the relative value of the economy's wealth. The majority of international reserves are held in US Dollars, when the dollar is weak, international reserves devalue, subsequently central banks increase their demand for alternative assets such as Gold. Another key factor has been the unwinding of the substantial levels of speculative long positions (buyers) in the gold market. For a large part of the recent rally, the scale of ‘net long’ positions had been reached record-breaking proportions. Since the gold price peaked at $1,225, the realisation of speculative trading profits, spurred further selling in futures markets, exacerbating the yellow metal’s correction. In 2009 the gold price’s rise from $750/ounce has been driven primarily by growing fears over inflation and specifically the decline of the US Dollar. The greenback's decline has increased the relative appeal of physical assets, particularly gold, to protect against further devaluation. Western Central Banks have maintained interest rates unprecedented levels, practically zero, for almost a year now and have continued to ‘quantitatively ease’ their respective economies (print money). As a consequence government debt and international currencies are devaluing sequentially. A change in sentiment among the three major Western central banks, the US Federal Reserve, The ECB and the Bank of England may also see a turnaround in the trends which have fuelled the gold rally up to its record breaking peak of $1,225. On the London Stock Exchange gold equities have been impacted by the falling price of the yellow metal, with large, mid-cap and small cap gold stocks seeing red throughout. Major international producer Randgold Resources (LSE: RRS) fell 2% while Petropavlovsk (LSE: POG) dropped 1.5%. Elsewhere on the main board, Centamin Egypt (LSE: CEY) slid almost 4%, but Yamana Gold (LSE: YAU) was unchanged. Among the juniors, Uzbekistan operating Oxus Gold (AIM: OXS) was the only bright spot, as the junior explorer climbed 4% against the rest of the sector. Medusa Mining (AIM: MML), Metals Exploration (AIM: MTL), Cluff Gold (AIM: CLF) and Solomon Gold (AIM: SOLG) all fell more than 4% from Friday’s close. Also dropping were Norseman Gold (AIM: NGL), Mariana Resources (AIM: MARL), GMA Resources (AIM: GMA), Pan African Gold (AIM: PAF) and Patagonia Gold (AIM: PGD). Elsewhere Chaarat Gold (AIM: CGH), Archipelago Resources (AIM: AR.), Ariana Resources (AIM: AAU) and Kryso Resources (AIM: KYS) were more robust, as they all remained unchanged.

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