Gold Remains Above $1280 as the USD Reaches Target High
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
(Kitco News) - In this column a few weeks ago, I mentioned gold may continue to be under pressure until we see the rising U.S. dollar reach a technical target of 95 on the cash-settled index and I had assumed at the time, gold would be below $1280 when it was reached. However, I was pleasantly surprised to see the safe haven metal trading back above $1300 when it hit 94.97 earlier this week. The 10-year Treasury Note plunging well below the 3% threshold since last Friday has also been supportive of gold and the yellow metal was able to manage a monthly close just above this critical level yesterday.
Furthermore, both gold and the U.S. dollar rose in unison on Tuesday, receiving safe haven inflows from euro zone investors while the yield on Italy's two-year government bond jumped from 0.8% to 2.7%. It was the biggest one-day jump for Italian two-year bonds since 1989. The political crisis in Italy spooked the global marketplace this week when the Italian Democratic Party (PD) called for parliament to be dissolved “immediately” in order to hold elections in Italy as soon as July. Sources from several of Italy’s main parties said they were in favor of fresh elections on July 29, following an inconclusive vote on March 4. The Italian economy is the third largest in the euro and has been anemic, while the country is also heavily in debt.
If the crisis continues and leads to this election taking place, it will create more doubt in the minds of investors on whether Italy keeps the euro as its currency. And if Italy leaves, it’s unlikely the euro could survive. This sentiment may spread to other European nations and gold would likely draw significant safe-haven buying along with the U.S. dollar. While the political uncertainties in the euro zone continue or even increase, gold should remain in good demand as a safe haven.
Although there was a strong bounce from critical support at 115 in the euro earlier this week, I would expect safe haven buying coming into both gold and the dollar to continue if the Italian situation is the catalyst which eventually breaks this important level. The euro is down 7% against the U.S. dollar since the beginning of February and it is now trading at a 10-month low.
Moreover, gold has been soaring in Turkish Lira since the government withdrew its reserves of bullion from the Federal Reserve earlier this month. President Erdogan has asked all Turkish people to convert their dollars to Lira this week and there have been rumors of a possible monetary collapse in the Lira. It appears Erdogan is positioning himself to be able to seek his own power that would be contrary to international policy.
Gold stocks continue to trade sideways with little interest and volume has slowed to a trickle on many of the resource stocks I own and/or follow, making illiquid juniors difficult to sell. The GDX has continued to languish in a tight range between $21-$23 on historically low trade-weighted volume and tightening Bollinger Bands. Long periods of low volatility and shrinking Bollinger bandwidth usually leads to a big move in either direction and the catalyst could very well be the upcoming Federal Reserve Open Market Committee (FOMC) meeting on June 12-13th.
Therefore, caution is still advised in the gold complex until the market digests the contents of the speech from the FOMC meeting, which will be given by Fed Chair Jerome Powell at 2:15 EST on June 13th. Immediately following the speech next month, investors will be closely following the press conference as well for more clues regarding monetary policy. This continued lack of interest in gold stocks presents an opportunity to research your favorite juniors for desired entry points and if you require assistance in choosing the best quality juniors to invest, please stop by my website and check out the subscription service at http://juniorminerjunky.com/