easy forex Puts Gold 2% Under its Recent High

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easy-forex, head dealer, Nicolas Shamtanis notes that while gold is trading (in USD terms) about 2% off its recent record high, slowing growth in China and India along with weakening of the US economic recovery may keep gold prices in check.

easy-forex dealing room observed that recent increases in gold mark a recovery from a sharp decline in May. The May gold price decline was caused in part by an increase in margin requirements by the CME. The increased margin forced out some of the smaller and weaker speculative longs in gold. Gold gains have also been limited by diminished speculation that the Fed will adopt additional monetary easing measures despite signs of slowing of the US economy. Last week Fed Chairman Bernanke sent a strong signal that despite recent weaker US economic data the Fed is not planning additional loosening of monetary policy. A number of analysts suggest that the surge in the price of gold to record highs in 2011 is partly attributed to QE2 (quantitative easing). The Fed implemented QE 2 adding liquidity by purchasing 600 billion of US bonds. The liquidity helped fuel rising commodity prices and the price of gold. It also generated fears of rising inflation. The Fed bond purchases and QE 2 will end in June. The end of QE 2 and diminished speculation that there will be QE 3 limits demand for gold as inflation fears subside.

Slowing growth in China and India along with weakening of the US economic recovery are additional headwinds for the price of gold. China and India are major importers of gold. Slowing demand from these emerging nations could hurt demand for gold. Uncertainty about the US budget outlook contributes to concern about the US economic recovery. Speculation that the US will be forced to take significant austerity measures and cut spending to combat its record budget deficit may be deflationary and increase investor concern about the US recovery. With the Fed ending QE 2 and the US recovery slowing, major spending cuts would be a substantial drag on the US economy. The slowing of the US recovery coupled with the end of QE 2 encourages investors to move money out of risk assets like gold into US bonds. Demand for US bonds supports the USD and competes with investment flows to gold.

The Greek debt crisis is also impacting the price of gold. Gold traditionally has functioned as a hedge against inflation and as a safe haven from economic and political turmoil. Last week the price of gold traded a new record high in EUR terms as investors seek safe haven from the growing risk of a possible Greek debt default and fears that a Greek debt default could ultimately lead to the breakup of European Monetary Union. Last week S&P lowered its credit rating for Greece to the lowest in the world to CCC. EU officials so far have failed to agree upon a plan for restructuring the Greek debt or for authorization of additional bail out money for Greece. The EUR traded sharply lower versus the USD and at a record low versus the CHF in reaction to fear that the Greek debt crisis is worsening and Greece may soon default on its debt.

The price of gold is likely to continue choppy price range in US terms and may weaken if there are signs that US officials are becoming serious about cutting fiscal spending and reducing the budget deficit. Signs of fiscal retrenchment in the US and continued signs of global economic slowdown could boost demand for USD and spark selling of gold as investors look for safety in US bonds. The price of gold in terms of European currencies will continue to reflect concern about the EU debt crisis. A Greek debt default could spark significant demand for gold.

Nicolas Shamtanis
Head Dealer, easy-forex

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