Tuesday, July 1, 2014

Gold supported by European, Middle East turmoil

To give you an idea of the damage suffered across European bourses in the last two days, France’s CAC40 stock index is currently 4% below its 6-month high from earlier this month.  The following chart of the iShares MSCI France ETF (EWQ), a proxy for the France stock market, shows the extent of the damage. 

Britain’s FTSE stock market index was particularly hard hit by selling pressure on Wednesday.  The iShares MSCI United Kingdom ETF (EWU), a proxy for Britain, was some 6% below its year-to-date high from just over a week ago.  The stock markets of Germany and Italy were also lower in the last two days.

In London on Thursday, the Bank of England (BoE) identified rising house prices as a major threat to financial stability, imposing new “loan to value” limits on mortgage lenders.  This is part of an ongoing concern as two chief U.K. financial-policy makers warned earlier this month of a U.K. housing bubble.  BoE Governor Mark Carney called real estate “the greatest risk to the domestic economy.” 

Commenting on this, the Wall Street Journal wrote: “Britain’s concerns highlight a central challenge to policy makers in the era of low interest rates: how to prick bubbles early without sapping a tremulous recovery.”  The preemptive strategy for preventing the sort of real estate crash the U.S. suffered a few years ago isn’t without peril, however.  Putting the brakes on lending and trying to deflate bubbles can often backfire and create panic in the investment markets, thereby creating a self-fulfilling prophecy of deflation.  Such a scenario would undoubtedly benefit gold as investors would likely run to the safe havens (much as they have since the beginning of June).

These are just some of the front-burner events driving the price of gold right now.  Analysts at major investment banks, meanwhile, continue to downgrade gold’s prospects.  Several analysts were quoted on Thursday’s in the financial press as saying  that gold faces limited upside prospects from here, and may even decline due to bearish fundamental factors.  A Reuters report noted that gold’s recent gains were “largely driven by short covering as speculators bought back their bearish bets, while gold-backed exchange traded funds have also failed to attract buyers despite bullion’s rally.”  According to an analyst quoted by BullionVault, gold imports to China via Hong Kong fell to their lowest levels in 16 months at 52 tons net of exports, which was given as a reason for remaining bearish on the metal. 

As long as events in the Middle East and Europe continue to drive investor uncertainty, however, it should provide continued support for the yellow metal.

[Excerpted from the Jun. 26 issue of Gold & Silver Stock Report]