Global Economic Conditions Drive Investor Sentiment, Benefitting Gold and Other Precious Metals

08 June 2010, 02:32 p.m. EST
By Debbie Carlson


Chicago--(Kitco News)--European debt  problems and fears that global growth will lag put investors in an apprehensive mood Tuesday and they drove gold prices to record highs and showed little sign of backing away in coming weeks.

Technical chart strength also lent support to gold, analysts said. At 2 p.m. EDT, the the spot gold price was at $1,243.10 an ounce. It had earlier set a record at $1,253 an ounce.

Other precious metals were firmer too, with silver up $1.60  an ounce, palladium up $8.00 an ounce  and platinum up $8.00 an ounce.

The driving fundamental force for gold remains the worries over European sovereign debt, market analysts said.

“There is a lot of fear. The problem in Europe is growing, not shrinking,” said Charles Nedoss, senior market strategist at Olympus Futures.

Nedoss said by the end of summer/beginning of fall, gold could hit $1,300. "And I don't think I'm going out on a limb," he said.

Gold took out the previous record set May 12 as equities return to the lows put in during the “flash crash” last month and the sluggish action in the global indexes has some investors believing that equities are likely to see further losses, giving them more reason to buy hard assets.

U.S. equities saw some early strength Tuesday following an interview of Federal Reserve Chief Ben Bernanke by ABC News television reporter Sam Donaldson. In the interview Bernanke said he does not see the U.S. going through a double-dip recession and sees economic growth there continuing, albeit slowly. However, U.S. equities were unable to hold its gains in light of losses everywhere else.

Mike Daly, gold specialist for PFGBest, said gold has essentially decoupled from all other markets. Not only is the European debt crisis a price-support, but the background of geopolitical tensions such as Mideast skirmishes and tensions between the two Koreas unnerve investors for other assets.

 “It’s really become the beast. But gold doesn’t care what other markets are doing. It doesn’t even care what crude oil is doing. The world knows what gold is. It might not know what an S&P is, but they know gold and they want it,” he said.

Nedoss and Daly said the concerns about fiat currencies are driving investors to gold, which is why prices for the metal are rising to new highs in the euro, sterling and yen. “Europeans have lived with a lot of currency problems, so this resonates with them,” Nedoss said.

As many market analysts have said recently, the austerity plans put forth by Europe will also mean reduced demand for goods and services, dinging global growth and ushering deflation there. That makes gold desirous as a store of value.

Not only does gold have an on-going fundamental support, but a lot of the strength currently is based on technical-chart aspects. Daly and newsletter editor Dennis Gartman of The Gartman Letter said Monday’s rally came on no fundamental news.

“There was nothing of consequence in the way of news to drive gold higher, and in that instance we are even more supportive of the bullish trend….,” Gartman wrote. “Denials by some less-than-top-ranked IMF officials regarding the rumors of impending gold sales by the fund could be pointed to, if one needs that sort of thing, to account for gold’s strength; however, we are simply of the notion that the trend for gold is upward; that that trend remains intact firmly and convincingly and that after a sufficient period of consolidation and/or correction, the major trend reasserted itself and prices rose skyward.”

Nedoss said momentum buying is a large part of the current move up. “It’s most definitely a technical trade,” he said.

For example, he said, the August Comex gold futures have held solidly above the 20-day moving average, a target for technical-type traders. It also tested the $1,200 level and rebounded smartly. Because of the twin strengths, gold’s trajectory is higher.

Some market watchers said while the investment demand is driving up gold, jewelry demand for gold, the traditional driver of price, has withered in the rally. Barclays Bank said in a research note Tuesday that the force of investment buying is more than making up for that bearish aspect. “The strength of investment demand has offset weakness in physical supply and demand flows and in our view, the motives to support continued interest in gold remain intact for now, thus prices are likely to retain their recent gains barring short-term corrections amid profit-taking,” they said.

Daly suggested that demand for all luxury items has dropped in the global recession which is why jewelry sales are down. However, that doesn’t mean that physical gold demand is down. “When you buy jewelry, you’re paying more for the workmanship than the gold. A $500 bracelet might have only $300 worth of gold,” he said.

He added that when gold prices have dipped, physical buying comes out of Asia – where most gold jewelry is bought. Also, he said the record gold coin sales in May from the U.S. Mint underscored the demand for physical gold.

Demand for gold as a safe haven will likely continue as long as the European debt crisis remains on the forefront, Daly said. “Unless the Europeans come out and say that we’re strong, and we’re going to do everything to save the European Union (gold might fall), but they’ve had so much internal bickering… Europe will eventually right the ship, but we don’t know if it will look like it does now,” he said.

By Debbie Carlson, contributing to Kitco News;