The Week In Hindsight, 18 July 2014

Gold remained under pressure for much of this week as traders turned bearish on the metal. This follows six weeks of increasingly bullish bets as investors sought crisis insurance in response to growing uncertainty in both global economic and geopolitical environments.

Spot prices briefly tested below the $1300 level during the early stages of the week, before poorer than expected economic data from the US and an attack upon a Malaysian airlines flight in the skies over Ukraine, led the metal to undergo a sharp correction toward the upside.

In a similar fashion to that of our last update, our medium- longer term outlook for gold remains bearish, however; we do not envisage a sustained break below the $1300 level to materialise any time soon.

This is primarily as a result of an accelerated level of geopolitical risks still being present within the global investment environment. Most notably, recent actions in Ukraine (airline) threaten to rapidly escalate a pre-existing crisis, with coordinated high impact sanctions upon Russia now a genuine likelihood. Such sanctions would be likely to attack the nation’s energy industry, given its dominance over the economy.

Should this scenario become a reality then an adverse impact upon European economies (Inc UK) would be difficult to avoid. The most probable effect would be in the form of higher (energy induced) inflation, which could have a knock on effect upon confidence, investment and general economic activity.

Further implications of this scenario, if protracted over time, could include lower growth figures for 2014 and a prolonged period uncertainty and stagnation. Each of these are conducive to high levels of uncertainty surrounding global economic growth, which is supportive of resilience in gold prices.

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