May 31st Weekly Gold Market Update

Despite ending the previous week looking quite stable, the price of gold fell sharply as soon as the markets opened last week. From an opening value close to $1,210 it dropped more than $20 in the space of two days, a serious upset to the market. It’s not all bad news though; after the initial drop gold stabilized again by late on Tuesday and spent the rest of the week slowly regaining some of what it had lost. By the time trading finished Friday afternoon it was standing at $1,190, for an overall loss of $15.90. Following on top of a slightly larger loss the week before that’s disappointing, but we’re encouraged by the fact the price quickly steadied and started to pick up again.
Yet again gold moved in the same direction as the US equities market for most of the week, instead of one driving the other in the opposite direction as usually happens. The latest data shows that the US economy shrank by 0.7 percent in the first quarter of this year, mostly because the strong dollar has seriously harmed exports – that sector saw a fall of 7.6 percent. There are now fears that the expected growth in the second quarter will be weaker than predicted and this is likely to lead to continued falls in the Dow Jones. Normally we’d expect weak share prices to boost demand for gold but in the current climate that doesn’t seem to be guaranteed. Instead it’s likely that the dollar’s strength – it’s up 17 percent over the past year against a basket of the other major currencies – is attracting investors to the currency market instead. Dollars are buying a lot of foreign cash at the moment and that has an obvious attraction, especially if Greece exits the Euro in the near future and the single currency rebounds; anyone who’s bought up cheap Euros could profit nicely by turning them back into dollars.
Meanwhile the oil market remains weak – that’s also a major contributor to the economic slowdown – with both WTI and Brent crude up over the week before, but only by a few cents; WTI is a fraction over $60 and Brent still around the $65.50 mark. These low prices are bad news for the US oil industry, which has higher extraction costs than its Middle Eastern rivals. They also mean there isn’t much chance of short-term profit from oil, and in theory that should boost other commodities like gold. The one-year forecast for WTI is just $69, just two-thirds of where it was a year ago, so market conditions are looking good for gold.
So overall, despite the drop over the past two weeks, the outlook for gold is cautiously optimistic. While a general economic slowdown is a possibility, and would reduce total investment spending, gold has historically benefited from these situations. Its traditional role as a safe haven makes it well placed to benefit from a weak stock market and if the quarter two figures are as weak as analysts now predict we can expect to see the spot price rise.

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