Is the selloff in gold and silver temporary?

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On Monday, both – gold and silver futures fell sharply due to a number of reasons. Analysts attribute the decline to media reports of a potential statement from the Group of Seven nations aimed at averting a so-called currency war. In addition, technical selling and light trading volumes in Asia due to the Lunar New Year holiday pressured prices further.

Gold for April delivery fell $17.80, or 1.1%, to settle at $1,649.10 an ounce on the Comex division of the New York Mercantile Exchange. This was gold’s lowest settlement since January 7, tracking the most-active futures contracts,

Silver for March delivery settled down 53 cents, or 1.7%, at $30.91 an ounce.

News reports said G-7 officials continue to weigh the possibility of issuing a statement aimed at averting a so-called currency war. The G-7 is includes the United States, the UK, France, Germany, Italy, Canada and Japan. Officials from the Group of 20 nations told Reuters that a G-7 statement could be released ahead of the meeting of G-20 finance ministers and central bankers in Moscow later this week.

The expected statement would focus on a commitment to market-determined exchange rates and governments not using policies to drive currencies in either direction.

Gold is seen as benefiting from competitive currency devaluations, as it’s often bought as a hard-asset alternative to depreciating paper currencies. Market participants may actually move into gold amid the uncertainties surrounding the fiat currencies.

The ICE dollar index, which measures the greenback against a basket of six other currencies, was at 80.213 on Monday versus 80.234 in late North American trading on Friday, shortly after the close of regular gold trading on Comex.

The greenback strengthened sharply against the yen but weakened against the euro EURUSD -0.15% after Bundesbank President Jens Weidmann said data do not point to any serious overvaluation of the euro.

The outlook for the dollar is particularly important given that commodities priced in dollars, including gold, often trade inversely with the greenback. Moves in the U.S. unit can influence the attractiveness of metals to holders of other currencies.

Meanwhile, light volumes due to the Lunar New Year holidays and a lack of economic data releases contributed to Monday’s selloff in the gold market.

Gold was also hit by technical selling following a fall below its 200-day moving average of $1,665.10.

For now, the market is watching the $1,645 as potential support for gold. If gold closes below that level, we could see more losses in the days and, possibly, weeks to come.

March silver dropped 53 cents, or 1.7%, to $30.91 an ounce, settling below $31, the metal’s support level.

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