After six straight sessions of gains, gold prices dropped by almost $10 in early trading on Thursday. Having ended Wednesday’s session at $1318.40 an ounce, the yellow metal was trading at $1309.40 by the time the London market opened.
It has been a common trend all week however, with the Asia market in a cycle of selling and the west intent in buying. Concerns over the actual strength of the US economy together with the respective energy crisis in Iraq and Ukraine is making western traders nervous.
In recent months, positive economic data released by the US government had indicated a steady growth and confidence was returning to the market. However, the reluctance of the Federal Open Market Committee to increase interest rates has cast a shadow over the recovery.
Chairwoman of the Federal Reserve, Janet Yellen has expressed her intention not to push the economy too hard which suggests it is still fragile. Given the US is carrying $17.5 trillion worth of debt, the Fed has serious cause for concern. Official projections for growth have been called into question.
As a result, investors turned to the safe haven of gold. The precious metal recovered losses earlier in the month, but the dollar subsequently slipped against a basket of currencies and the US economy contracted quickly by 2.9%, the worst pullback for five years.
Gold’s zero yield
Low interest rates is good for gold as precious metals procure a zero yield on interest rates. Gold value is influenced by demand and changes in the rate are indicated by the daily spot price.
Given the Fed has indicated interest rates will stay low for some considerable time, investors are favouring precious metals in the current market because they know they will make higher gains than if they invested in equities – which are already overpriced.
The demand for durable goods is also slower than analysts would like and indicates an uneven recovery, despite Yellen’s positive assessment of the US economy. The violent conflict in Iraq is also unsettling nerves, particularly since ISIS took control of another major oil refinery.
Although the Asian market boasts the world’s two highest consumers of gold in China and India, demand from both consumers and investors have been muted over the past week. Analysts have indicated central banks are waiting to ignite inflation and have curbed imports on gold.
The weakening of the US dollar is also encouraging the Asian markets to support their own currencies and the Chinese Yuan in particular. With the economy in China beginning to perform strongly after a sluggish start to the year there is cause for optimism.
Traders in Asia are cashing in on short-term gains, particularly as the mid to long-term impact of the economy is so difficult to predict right now. Central banks are intent on keeping interest rates low until they feel it is the time to put a light under inflation.
The professionals are investing in gold and it seems as though this is a good time for consumers to follow suit. Head over to coininvest.com today and check out the latest prices on gold bullion.