Gold investors are wondering how much longer the metal will remain
stuck in the mud as they await the next major “fear catalyst” that will launch
a sustainable rally. Gold futures have gone
nowhere recently as traders assess the safe haven demand for the metal in the
wake of recent economic reports from the U.S., China and Europe.
Many investors wonder if perhaps volatile situation involving
Russia and Ukraine will be the catalyst gold needs to launch a new bull
market. Adrian Ash, head of research at
BullionVault, hit the nail on the head when he told MarketWatch: “Gold’s
exposure to Ukraine looks asymmetric. It’s
not rising on the crisis, but might be vulnerable to a resolution.”
Despite the efforts of mainstream media outlets to fan the flames
of a Ukrainian showdown with Russia, however, the weight of evidence suggests
the crisis has cooled considerably since last month. See Time
magazine’s latest cover below.
Even Time’s cover story
by Michael Crowley and Simon Shuster admit that in the West, “there’s little
appetite for harder-hitting measures” (i.e. economic sanctions) against Russia
for its invasion of Ukraine. Germany,
for instance, is one of Russia’s main trading partners and according to the
article, “Volkswagen, Adidas and Deutsche Bank are all opposed to broader
sanctions.” In other words, Big Money
has prevailed against the war hawks in the U.S. who want to see another Cold
War. This is good news for Russia and
the global economy, short-term at least, but it also represents one
underpinning for gold’s appeal as a safe haven investment.
As we also looked at in a previous commentary, the Market Vectors
Russia ETF (RSX), a proxy for Russia’s stock market, suggests that Russia won’t
be a point of contention or a volatility factor in the immediate term. As I wrote previously, “In contrast to the
weakness displayed by the ETF in February and March, the RSX is on the mend and
appears to be establishing an interim bottom.”
I also pointed out that if RSX manages to break out above its 10-week
chart resistance at the 24.00 level it can only mean one thing: war has been
forestalled for the foreseeable future.
While this would be good news for Ukraine, it’s not the news gold
investors are looking for.
Another major factor which has underscored gold’s safe haven
status in the past few months has been China.
Specifically, investors rotated into gold earlier this year when it
looked like China’s economy was headed toward a recession. Even now the economic data points to a soft
Chinese domestic economy, with the China’s retail sales slipping to 11.9% in
April compared with 12.2% in March.
Analysts have pointed out that gold has gained 7.5% in 2014 due to
safe-haven demand in the West, partly thanks to China. Yet even China’s stock market refuses to
confirm the near-term weakness that analysts have forecast. The China Large Cap ETF (FXI), a good proxy
for China’s stock market, has established a short-term low at the 34.50 level
and is still well above its March low of 32.50.
Unlike the economic statistics released by the government, FXI is
forward-looking and seems to be reflecting a near-term scenario considerably
less bearish than that of projected by the China bears. This represents one less safe-haven support
for the gold price.
Barring a resurgence of geopolitical and/or financial market
volatility in the coming weeks, what could come to gold’s rescue and provide
the catalyst for renewed demand?
Surprisingly, it might be nothing more than the simple yet sudden
recognition among investors that gold is unloved and underappreciated. In a note to its clients on Tuesday, UBS
strategists Edel Tully and Joni Teves downgraded the bank’s one-month and
three-month outlook for gold. Yet they
also suggested that diminished investor interest in the yellow metal would
translate into gold putting in a short-term bottom. The bank also expects gold to trade within a
somewhat volatile trading range in the months ahead.
“Gold is not on the radar for many, and with
broad expectations that prices will be range-bound this year, many investors
are opting to stay out of this market,” said UBS. “That is probably gold's biggest positive right
now.”
