The upward trend of gold came to an end today as prices fell from a high point of $1391.76 to $1366.10 by mid-afternoon New York. After Crimea voted to join Russia, the US have issued the sanctions they threatened on Russia and the EU has enforced travel bans.
It will be interesting to see how the Russians react to the sanctions, but with $120bn of holdings in US currency, Putin has the upperhand and could bring the dollar to its knees.
Having pulled investments from Russia, the US equity market enjoyed a rally, but sentiment is expected to be short-lived. Analysts say that whilst the tension between East and West are strained, gold prices will continue to climb – although a pullback on gold spot prices is likely.
Traders expect easing
The geopolitical strife in the Crimea is nothing new and many traders are calling the political bluff. Events may be manipulating markets at the moment, but the switch between precious metal commodities and equities in East European indicates the players are making to healthy short-term games.
Technical data shows promising signs for gold investors. The yellow metal has rallied by 15% already this year and the signs are that it will stretch its run to seven weeks of consecutive gains.
The Russia crisis may toil with gold trades in the short-term, but the long-term outlook of gold spot prices will be determined by the world’s two strongest economies. After a disappointing start to the year, US job data for February showed signs of recovery and market sentiment is returning to US investments.
As the world’s largest economy, progress in the US is a good sign for the recovery of the global economy. After US employees added 30,000 more jobs than forecast last month, the financial future was beginning to look promising. Ironically in the same week, a default payment in China could tip the apple cart.
It is inevitable that the credit culture banks have employed since the 1950’s will collapse at some point, and although the US has postponed their action to manage debt until March 15, the People’s Republic of China is facing a credit crunch.
For the last couple of decades it has been the norm for companies to invest in metals as a hedge against borrowing. The practice is considered China’s “shadow banking system,” but a recent default in payment has exposed the practice as a liability. It could collapse the world’s second largest economy.
The warning signs are pointing towards a collapse of the yuan which will push spot gold prices higher. A slow-down in demand of industrial metals has seen copper slump to a 14% deficit already this year and iron ore tumbled to an 18-month low last week.
The state of the Chinese economy poses the greatest risk to the global economy at the moment and a crises will mean gold spot prices will continue their upward trend. The fix now rests with China’s central bank, but if they fail, gold prices may never be this low again so if precious metals are not already a part of your investment portfolio, take your chances to add gold whilst the price is still affordable!