Gold News

Gold Prices Drop to "Short-Term Support" as Argentina Hits Default, US Fed Member Votes Against Delaying Rate Hikes

GOLD PRICES fell to 6-week lows Thursday lunchtime in London, touching $1286 per ounce as Western stock markets also fell and the Dollar rose amid news that Argentina is in default on its government debt.
 
New data following yesterday's strong growth in GDP showed the strongest rise in US employment costs since 2008, up 2.0% in the year to end-June.
 
Chinese equities had earlier risen while the rest of Asia held flat.
 
The US Dollar rose to new 10-month highs vs. the Euro after new Eurozone data showed the slowest pace of consumer-price inflation since late 2009 in the 18-nation currency zone.
 
"Gold could find support from Argentina's renewed insolvency," reckon commodity analysts at Commerzbank in Frankfurt.
 
Failing to reach agreement with hedge funds led by Paul Singer's Elliott Management – who bought $1.5 billion of bonds after $144bn were restructured in 2005 following the 2001 default – Argentina was deemed to be in part default by the S&P ratings agency overnight.
 
"It is now somewhat unclear," says Commerzbank, "how the events in Argentina will affect the future debt rescheduling of other countries, especially emerging economies."
 
The Buenos Aires stock market rose 7% yesterday as the likely default became clear. The Peso today slipped to new post-restructuring lows.
 
Looking at short-term charts, gold investment "is taking support," reckons a technical analysis from French investment bank Societe Generale, "at the steep trend line" running down from mid-July's 15-week high at $1345 per ounce.
 
"Hourly indicators are [also] holding support," it adds, pointing to a "downside floor" at $1288-92 per ounce.
 
But further out, says Australia's ANZ Bank, the United States "robust GDP numbers [have] also created a headwind for gold as Treasury bond yields and the US Dollar rose."
 
Wednesday's US Federal Reserve meeting ended with a 9-1 vote in favor of keeping rates at zero and reducing the monthly pace of QE by another $10 billion to $25bn.
 
The first dissenting vote since Janet Yellen took the chair this year, Philadelphia Fed president Charles Plosser objected to the central bank's assurances of keeping rates at 0% for a "considerable time" after its QE asset-purchase program ends.
 
The US Dollar has now gained 2.2% against the Euro since the Fed began "tapering" its QE asset-buying program in December.
 
Ten-year US Treasury yields have fallen one-third of one percentage point, reversing the rise made during the second-half of 2013.
 
Gold prices have risen 5.2% and the S&P 500 stock index has risen 8.8%.
 
"Gold is a low or zero-yield asset," says a note on gold prices and US Fed rates from Japanese trading house Mitsui. "Tighter monetary policy and higher interest rates should therefore pose a downwards threat to the gold price."
 
The fact gold is primarily priced and dealt in Dollars means a rising US currency would also be "bearish".
 
However, Mitsui believes that any US tightening "is likely to occur later than the market suggests" – and that delay "should be bullish for gold in the short to medium term before rates actually start to rise."

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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