Gold prices received a significant boost in today’s trading as prices breached the $1300 strong point and gained a further $10 by 1400 EST. The increase could be due to the increasing political tension with Russia, but there could also be a concern over impending inflation.
A slide in the US dollar index prompted some safe-haven asset purchases in early trading, but geo-political tensions in Eastern Europe is once again disrupting the market. It appears that Vladimir Putin is not content with the annexation of Crimea and has set his sights on East Ukraine as well.
Russian forces, who have been stationed on the eastern frontier with Ukraine for several weeks now, made a move into Donestk this morning and have taken control of a government building. US Secretary of State has called the move “deeply disturbing.” Increasing tension will result in a bull market for precious metals.
US economic data
Investors are now waiting on the minutes from last week’s Federal Reserve Open Market Committee meeting. The report will be made public on Wednesday morning and will reveal key infliction points to the US economy and Fed plans to keep the ship afloat.
Carrying almost $18 trillion of debt, the US economy is by no means secure, and the consistent weakening of the dollar is making traders nervous. The forecast for the market place in the second quarter does not look promising according to data released this morning by International Monetary Fund (IMF), NFIB small business index and Goldman Sachs retail report.
Technically, gold futures hint at a bear market, but influencing factors suggest gold is about to enter another bull run and push the technical resistant point up to $1320 and beyond. The fear is that the US economy relies too heavily on credit whilst exports and business investment is weak.
Where now for gold?
Despite what reality indicates, the IMF world economic outlook published on Tuesday morning says that steady growth in the US economy will benefit the world economy although did point out that inequality was a threat to sustainable growth in the global recovery.
The IMF report cites the wealth divide presents a long-term problem for many nations and will “have major implications for macroeconomic developments.” The culture of easy credit means people are borrowing money so they can live beyond their means rather than take a step backwards and downsize on the quality of life they have become accustomed to.
The increase in inflation will cause an even greater strain on the budget of households around the globe, pushing people further into debt and piling the debt on the credit system. Meanwhile, political tensions will keep gold prices high.
The debt ceiling has to collapse eventually, but with central banks and politicians intent on keeping gold prices over the $1300 barrier, gold prices are not as attractive as the $1220 average analysts had predicted. The question for investors is whether to add gold to their portfolio now before prices go up, or wait and see how traders react to an improving global economy.