Gold Prices Supported by Renewed Concerns about the Global Financial Market as well as Increasing Geopolitical Tensions

Gold prices fell sharply on Monday after posting their sixth straight weekly gain. The price of the yellow metal came under some initial selling pressure during the Asian and European session, but on the opening of Comex when some trader dumped an estimated $1.7 billion of futures contracts, the price of the yellow metal fell rapidly.

The price of gold was boosted last week due to a potential issue in the Portuguese banking system, the escalating conflict in Israel, and the Federal Reserve’s latest minutes.

The price of spot gold breached the $1,340 an ounce level to hit a four-month high last Thursday as the shares of Portugal’s largest bank, Espirito Santo, were suspended, sending tremors through global financial markets, triggering a sharp fall on European bourses and a flight to safety across the world.

Portugal’s regulator suspended trading of Banco Espirito Santo after its share price crashed 17% in Lisbon, reviving worries about the underlying health of Europe’s banks. Yields on Portugal’s 10-year debt surged 20 basis points on Thursday to 3.95%, with contagion spreading to Greek, Spanish and Italian debt.

On Friday,  concerns eased about Portugal’s banking system when Banco Espirito Santo,  said it does not believe any losses will compromise its regulatory capital requirements and that it has a 2.1 billion euro buffer above its regulatory minimum. The bank’s stock resumed trading and rebounded sharply higher by 12%, erasing much of Thursday’s 17% drop that led to a trading suspension.

Last week, the US Federal Reserve released minutes from the June FOMC policy meeting.  Federal Reserve officials agreed at their June policy meeting to end the central bank’s bond-buying program by October, closing a chapter on a controversial experiment in central-banking annals with results still the subject of immense debate.

Officials have been winding down their purchases of Treasury bonds and mortgage-backed securities in incremental steps since January and have said they expect to end the program later this year, but until now haven’t been explicit about the end date. 

Critics have long argued the program risks causing another financial bubble or excessive inflation, without giving an obvious boost to hiring. Fed officials and other supporters of the program argue it has helped the economy grow faster than it would otherwise grow, with limited risk.

The Fed first started bond buying during the heat of the financial crisis in early 2009. It expanded its efforts in September 2012. Since the last expansion, its total holdings of bonds, loans and other assets have grown from $2.8 trillion to $4.4 trillion.

The Fed has already reduced its purchases in $10 billion increments to $35 billion per month from a peak of $85 billion. Its stated plan is to reduce it in increments at its next three policy meetings, ending it in October with a $15 billion reduction. 

Behind the Fed’s decision to wind down the program is a view that the economy is gradually strengthening, despite a first-quarter contraction in growth.

While it is apparent that the money printing of the US central bank has done little to stimulate the economy it has created the fourth biggest bull market in equities since the 1929 crash after stocks have nearly tripled since the financial-crisis low set in early 2009. But, this rise in share prices is a total aberration as prices have not been driven higher by a surging economy or strengthening corporate profits, but by financial institutions, a few wealthy participants and traders who have used been coerced into purchasing equities due to the near zero interest rates.

In the US, a study by the Pew Research Centre, published in May, found stock ownership by households is shrinking, at 45%, down from more than 65% in 2002. Even with the Dow Jones Industrial Average DJIA reaching the 17,000 milestone, investors are leaving stock mutual funds, not buying them.

In all of the previous bull markets, the market reflected strong economic trends: solid growth, high or strengthening employment and stable inflation. Only the latter is present today. The unemployment rate is improving, but it’s still a relatively high 6.1%. The best GDP rate produced since the financial crisis was 2.8%. That was in 2012, before the current bull market really took off.

Meanwhile, gold prices were well supported by geopolitical concerns. While tensions continue to escalate in Ukraine and Iraq, traders seem to be focusing on the deteriorating situation in Gaza.

The violence in the region escalated over the weekend as Israel widened its range of Gaza bombings while Hamas rockets continued to be launched at Israel.

With the Palestinian death toll now reaching more than 160 and with no Israelis killed, the UN Security Council unanimously urged Israel and Hamas to respect “international humanitarian laws” and stop the loss of life.

Thousands of Palestinians are fleeing northern parts of Gaza after Israel warned it was targeting the area in its campaign to stop the continuing rocket attacks from Gaza militants.

The UN says 17,000 people have sought refuge in its facilities.

On Sunday, Israeli forces raided a suspected rocket launch site in Gaza in their first reported ground incursion.

Israel says it is targeting Hamas militants and “terror sites”, including the homes of senior operatives.

Both sides have dismissed calls for a truce, and Israel continues to build up troops along the Gaza border ahead of a possible ground invasion, warning Palestinians in northern Gaza to evacuate their homes.

The price of gold has climbed 11% this year, outpacing gains for indexes of commodities, equities and Treasuries. Investor holdings in exchange-traded products backed by the metal have rebounded this month as turmoil spreads in the Middle East and Eastern Europe.

I believe prices may correct before they move higher due to safe-haven buying as financial market concerns reemerge amid an escalation of geopolitical tensions.

TECHNICAL ANALYSIS

The latest drop in gold prices will test the support at the $1300/oz. level. I expect to see prices hold at this level and then trade upwards.