EDITOR'S NOTE: Catch the all new Kitco.com Market Data and Bitcoin sections!

Debbie Carlson

Gold Market Will Keep Eye On Possible Geopolitical Events

By Debbie Carlson of Kitco News
Friday, July 18, 2014 2:17 PM

(Kitco News) - With a continued absence of physical demand and a light economic calendar for next week, gold market participants will likely keep an eye on geopolitical events which have a tendency to produce at least short-term volatility in the market.

August gold futures fell Friday, settling at $1,09.4.40 an ounce on the Comex division of the New York Mercantile Exchange, but down 2.1% on the week. September silver fell Friday, settling at $20.886 an ounce, down 2.7% on the week. 

In the Kito News Gold Survey, out of 37 participants, 25 responded this week. Of those, 11 see higher prices, nine see lower prices and five see prices trading sideways or are neutral. Market participants include bullion dealers, investment banks, futures traders and technical-chart analysts.

Gold prices saw wild swings this week, first falling sharply Monday on profit taking after reaching the highest level since March in the previous week and ahead of Federal Reserve Chair Janet Yellen’s congressional testimony. The yellow metal’s value rallied Thursday following the tragic news of a Malaysian commercial jet shot down in Ukraine and a pick-up in the Israeli-Hamas conflict. By Friday gold pulled back from the knee-jerk reaction to hold just over $1,300.

One North American bullion dealer said this week’s whippy trade shows how easily gold can move in a lightly traded market.

“This market is giving me a headache. It’s very choppy. The bias is to the downside because there is no physical demand, but with the external developments we’ve seen, like yesterday, it’s easy to push this market around. We see producer selling at the highs, but the physical demand doesn’t pick up at the lows. Still, there is some bottom feeding going around that is picking us up to stay over $1,300,” he said.

There’s quite a bit of debate in the gold market about the way the metal reacted to Thursday’s twin news events of the downing of the Malaysian jet in Ukraine and the Israeli offensive into Gaza.  On one side are market participants who read the geopolitical events as giving gold a bid and underpinning prices. The other side, however, says they were dismayed gold prices didn’t skyrocket yesterday after two major events.

George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures, falls into the first camp. He said he looks for gold to have an upside bias next week on an expectation that geopolitical issues will continue to simmer. Often, geopolitically inspired rallies are short-lived, he said. But there are still many on the market’s radar, from Ukraine-Russian tensions to Iran’s nuclear program to fighting in Iraq to Israel-Hamas clashes.

“All of the ongoing geopolitical problems could underpin it next week,” he said. “I think they will.”

Colin Cieszynski, senior market strategist at CMC Markets, said he also sees prices rising next week, too. “The shakeout earlier in the week cleared out the overbought conditions that had developed, while Thursday’s rally indicated that traders still see gold as a haven from uncertainty in the world. As markets become less complacent, gold may attract additional support. (The) $1,322 … Fibonacci level looms as initial resistance,” he said.
Reflecting the counterargument is Afshin Nabavi, head of trading at trading house MKS (Switzerland) SA. He said he was surprised that gold didn’t produce a stronger safe-haven rally Thursday.

“The unfortunate news that happened yesterday … took prices up. But we ran out of breath at the $1,325 area. With all the geopolitical news in Ukraine and the Middle East with Gaza, gold was unable to make new highs. With the (news yesterday of) a commercial flight shot down over a war zone … we should have been $1,400-plus and it didn’t happen. In my point of view, that’s very bearish for price. And physical demand is still poor,” Nabavi said.
The tendency for gold prices to have only a short-lived reaction to geopolitical events has some other analysts warning gold bulls not to get overly excited on market strength related to this type of safe-haven buying.

“Both the Ukraine and Iraqi crises have encouraged gold buying this year, but the impact has been inconsistent and moderate. In essence, this factor has not been a major contributor of gold upside; rallies this year based on a safe-haven bid have consistently proven to be nothing but a temporary, safe-driven rally. We expect much the same on this occasion,” said analysts at UBS.

They added, too, that sentiment in gold is feeble. “The market is lacking the momentum and optimism that was very visible last week” UBS analysts said.

They and other market watchers said the rally might have been caused by short covering as the near-$50 drop on Monday may have encouraged new short positions at the time – positions that likely turned into losing trades with Thursday’s rally.

UBS said if gold is to hold over $1,300 next week, long position holders will need to return as buyers and the risk-off sentiment needs to remain elevated.

Nabavi said volumes in gold may remain light. He said Ramadan will end around July 29 or 30 and that means little to no participation from much of the Middle East. In August, many European traders take extended vacations. Aside from those two factors, Nabavi said August brings few key market factors, the start of the CME Group/Thomson Reuters taking over administration of the silver fix and final preparations for the 25-kilogram gold bar contract to start trading in Singapore sometime in September.

Because of that, he said, “I don’t think we’ll see a lot of movement in the meantime; people might sit back and see what happens.”

Next week’s economic reports are fairly light, with consumer price index data and existing home sales due out Tuesday, new home sales on Thursday and durable goods orders on Friday.

Related Stories:

Allen Sykora contributed to this story.

By Debbie Carlson dcarlson@kitco.com
Follow me on Twitter @dcarlsonkitco


Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
kitco news

Precious Metal Charts

Click to see this Precious Metal chart
  1. 24h
  2. 30D
  3. 60D
  4. 6M
  5. 1Y

Interactive Chart