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Gold Outlook Hinges on U.S. Dollar Strength, Geopolitical Tensions

By , Currency Strategist
11 November 2011 23:27 GMT
Gold_Outlook_Hinges_on_US_Dollar_Strength_Geopolitical_Tensions_body_Picture_5.png, Gold Outlook Hinges on U.S. Dollar Strength, Geopolitical TensionsGold_Outlook_Hinges_on_US_Dollar_Strength_Geopolitical_Tensions_body_Picture_6.png, Gold Outlook Hinges on U.S. Dollar Strength, Geopolitical Tensions

Fundamental Forecast for Gold: Bullish

Gold had another strong week, testing the $1800.00 per ounce figure before falling back to settle at 1788.50/oz, good for a 1.9 percent gain. The shift later in the week away from the U.S. Dollar on dampened concerns out of Europe certainly aided the precious metal’s advance, as did chatter out of the Swiss National Bank. SNB policymakers were on the horn touting for a weaker Swiss Franc, further curbing the currency’s appeal as a safe haven; as such, on concerns that another fiat currency would lose its store of value, Gold rallied as investors flocked to the hard money.

The outlook ahead remains fairly bullish, now that markets are pricing out the chance of a Greek default given their 50 percent haircuts approved by the Euro-zone on October 27. A Greek default would have been a deflationary event, drying up market liquidity and thus forcing investors to sell their Gold holdings in order to cover losses accumulated by other assets.

Beyond Euro-zone fears, larger issues remain. The Swiss National Bank is not the only institution to step up its rhetoric of a possible intervention in the coming days and weeks, as Japan’s Ministry of Finance has also warned of direct intervention in the markets to weaken the Yen further. Considering Gold is priced in U.S. Dollars, should there be an intervention that would boost the value of the U.S. Dollar, Gold would likely fall. This was the case on August 4, September 6, and most recently October 31, the past three interventions carried out by Japan’s Ministry of Finance, the Swiss National Bank, and the Ministry of Finance once again.

Still, Gold still has significant room to move to the upside even if these interventions occur. Geopolitical tensions are rising throughout the world again, mainly in the Middle East, following weeks of saber-rattling between Iran and Israel. As concerns of war increase, Gold stands to gain as a store of value during a time of crisis. Overall, given our outlook for deteriorating global growth only to be countered by a further increase in the global money supply, Gold’s outlook remains bullish over the short- and medium-term, as long as a Euro-zone member state default is not on the horizon. –CV

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11 November 2011 23:27 GMT