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Currency Crisis Breathing New Life Into Gold? - Analysts

Kitco News

(Kitco News) - A Turkish currency crisis that could spread to Europe is breathing a bit of life into gold as a safe-haven asset. But, analysts are still concerned that the yellow metal faces tough competition against the U.S. dollar.

Bill Baruch, president of Blue Line Futures, said in an interview with Kitco News that the gold market could be close to reversing its downward trend as investors are starting to see value at current prices.

The gold market is preparing to see slight gains on the week, ending a four-week losing streak. Comex December gold futures last traded at $1,221.70 an ounce, virtually unchanged from the previous week. However, many analysts note that technically, the gold market is still in a downtrend as prices hover near their recent 12-month low.

“Gold is still down, but we think a tailwind is building in gold,” said Baruch. “We see value at these levels and we are buyers right now, protecting our position with put and call options.”

Renewed buying interest in gold picked up Friday as the Turkish lira fell to historic lows overnight. The U.S. dollar is up more than 22% against the lira.

“The trigger seemed to be the lack of credibility in the government's response as investors await officials to elaborate on the outline of the ‘new economic model’ provided yesterday,” said currency analysts at BBH.

Turkey’s currency crisis could weigh on the entire Eurozone. According to reports, the ECB has identified three major banks that have exposure to Turkey: Spanish Bank BBVA, Italian Bank UniCredit and French bank BNP Paribas.

Gold’s safe-haven appeal can be seen in Europe as the yellow metal is up 1% against the euro Friday. For the week gold is up 1.4% against the euro.

Andrew Kenningham, chief global economist, said that Turkey’s currency crisis has developed as a result of too loose fiscal and monetary policy, “resulting in rapid growth but also a build-up of vulnerabilities.”

However, he added that while Europe has the most significant exposure to Turkey, risks to global growth remain relatively small.

“Turkey’s economy accounts for just one percent of the world economy, at market exchange rates, which is slightly smaller than the Netherlands, for example,” he said. “Nonetheless… Turkey’s troubles are a further headwind for the euro and are not good news for EM assets either.”

Adam Button, currency strategist at, agreed that there are signs of renewed interest in gold, but he said that the market still faces many headwinds.

“Gold is up Friday and you just needed half of the world to collapse to boost it,” he said. “I would have liked to see a better finish this week given all that is happening in currency markets. However, it does seem that the odds are shifting for a better bounce in gold.

“This is a good time for the bulls to make their stand,” he said. “I don’t think this currency issue is going to go away anytime soon so we could see some more buying next week.”

Gold Still Has To Fight Against A Strong U.S. Dollar

While Button sees potential for higher gold prices in the near-term, he added that the market remains weak.

“I think I would rather short gold on rallies than buy dips at this point,” he said. “Ultimately, the Federal Reserve is going to keep raising interest rates and the U.S. dollar is going to remain strong.”

Button added that the U.S. dollar remains an attractive safe-haven as investors see the U.S. as the main pillar of strength within the global economy.

Baruch also noted that the U.S. dollar still has the potential to move higher. He explained that the greenback looks attractive as the “neighborhood” of other global currencies looks scary. In particular, the euro is down 1% against the U.S. dollar for the week; EUR/USD last traded at 1.1420.

Optimism Growing In Gold As Market Still Stuck In A Downtrend

Although gold prices continue to hover near its recent 12-month lows, optimism is starting to grow that an impending bounce is just around the corner.

In a recent interview with Kitco News, Chantelle Schieven, head of research at Murenbeeld & Co recommended that investors pay more attention to gold as the market is significantly oversold.

While she couldn’t rule out further weakness in the near-term, she said that her firm doesn’t expect gold prices to break last year’s lows. She added that they don’t see gold going below $1,000 an ounce.

“I don’t think interest rates are going to go high enough to push gold below $1,000 an ounce,” she said. “I think we would be hard-pressed to push gold below last year’s low.”

The research firm is expecting gold to catch a bid towards the end of the year as investors start to worry about the U.S. government’s growing debt.

Schieven added that the U.S. government could also start to put pressure on the U.S. dollar by the end of the year as a strong dollar will hurt economic growth and corporate earnings.

Key Levels To Watch

Although gold is attracting some buyers, investors continue to keep an eye on the recent lows at $1,205 and the $1,200 levels. If that goes many see prices dropping to $1,180 an ounce.

Jasper Lawler, head of global research at London Capital Group, said that he has been disappointed with the lack of strong conviction in the buy side of the gold market.

“The buying momentum just doesn’t seem to last very long,” he said. “The $1,205 level doesn’t look like it is going to hold,” he said.

Looking ahead, Lawler said that he would need to see a decisive break above $1,220 an ounce before he thinks investors are confident that the market has bottomed.

Baruch said that he is watching the $1,227 level. He added that a close above that could spark a short-squeeze rally that pushes prices above $1,250 an ounce.

“We just think gold is a good buy at these levels,” he said. “You want to own it now because with all this uncertainty we could wake up one morning and gold will be $20 higher.”

Other analysts say that $1,236 is critical resistance to watch in the near-term. In a recent interview with Kitco News, Ole Hansen, head of commodity strategy at Saxo Bank said that gold ultimately needs to push to $1,300 to attract new investors to the marketplace.

He noted that even a push to $1,260 an ounce could be seen as a short-term bullish correction in a long-term downtrend.

The Final Say

All eyes will be on Turkey and Europe next week, which could boost gold’s safe-haven appeal. However, there are also important U.S. economic data on the docket next week.

The calendar heats up mid-week with the release of U.S. retail sales and regional manufacturing data.

On Thursday, markets will get important housing construction data and more regional manufacturing numbers. The housing sector is garnering a lot more attention as the industry is showing some weakness because of rising prices and rising interest rates.

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 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.
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