Commodity Update; Gold – 08 September 2014

Gold continues its descent despite ECB action and a fraught international relations over Ukraine

Contrary to our expectation, spot gold fell throughout much of the last week and into Monday trading. The key drivers behind this have been a flurry of better than expected economic data from the US and Thursday’s ceasefire agreement between separatist rebels and Kiev’s forces in Ukraine.

While it is not clear whether the ceasefire will hold, the question remains that even if it does; will this be enough to prevent a greater deterioration in relations between Russia and the West given Washington’s insistence that Russia should face additional sanctions for its conduct to date.

Consequently, investors have inferred a reduced incentive to hold gold and this has led prices to come under pressure. In addition to this, the US dollar has staged a strong rebound of late, which may also have been a factor discouraging some potential buyers.

Going forward, much of gold’s fortunes will be dependent upon whether or not the ceasefire in Ukraine is able to hold and whether this will be sufficient enough to prevent an additional wave of sanctions against Russia.

If the accord does prove to be sufficient then the metal would then be in danger of resuming its longer term downward trend, with a sustained break below the $1240 level a clear flag that lower levels are on the horizon.

Despite this, we caution against excessive bearishness in the near term. This is because the crisis has proven itself to be one that is terribly difficult to predict at every step of the way, and with uncertainty still prevailing over the question of whether this truly is a turning point for Ukraine; another flare up may not be too far along the horizon.

In addition to the above, if whatever takes place in Ukraine during the weeks ahead proves to insufficient enough to persuade western powers to hold off on implementing further sanctions, then the potential for a worsening of diplomatic relations clearly exists.

Under this scenario, Russia could act upon its earlier warnings and retaliate with a range of measures including restricting access to its airspace, implementing measures to restrict flows of oil and gas to some countries and potentially; forcing international purchases of its oil and gas resources to be conducted in rubles in order to prop up its currency and combat inflation.

This scenario has the potential to increase uncertainty among investors and could be price positive for gold.

Further from here, and given that the Russian central bank has been the largest institutional buyer of physical gold for some time now; it also cannot be ruled out as a possibility that under the circumstances the bank may seek to tap the bullion market once again in order to diversify its reserves or circumvent any attempts at restricting its access to areas of the global financial system.

All in all, the outlook for gold prices over the near term remains murky as it is not possible to predict the exact course of events in eastern Europe. Nevertheless, while we maintain our bearish view for the metal over the longer term; we are not comfortable with stacking our chips heavily against it in the near term.     

Spot Gold Hourly Intervals

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