Italian Crisis Means Uncertainty For Gold Despite Safe-Haven Demand
(Kitco News) - Italianpolitical turmoil has created a conundrum for gold investors.
Ifthe crisis continues and leads to an election that threatens whether Italykeeps the euro as its currency - and this sentiment spreads to other Europeannations -- gold is likely to draw significant safe-haven buying, particularlyif equities go into a freefall, analyst said.
Sucha contagion scenario unfolded several years ago when a debt crisis hit Greeceand soon engulfed countries like Spain, Italy and Portugal as well.
Yet,the upside in gold - in U.S. dollar terms anyway -- may end up being limited ifthe turmoil should also result in dollar strength, since the precious metal tendsto move inversely to the U.S. currency.
Asa result, gold has been somewhat range-bound ever since the Italian crisisintensified in recent days, analysts said.
“Thereare so many components to it,” said veteran gold trader Kevin Grady, presidentof Phoenix Futures and Options LLC. “That’s why gold is [nearly] unchangedright now - because people are trying to figure it out. Is the currency goingto be the thing that moves gold? Will interest rates be the thing that movesgold? Right now, people aren’t sure.”
Infact, as of late Wednesday morning, the session’s high and low in Comex Augustgold was within Tuesday’s trading band. Technical-chart analysts refer to thisas an “inside day” and see it as a sign of market indecision about the nextshort-term price move.
Traderswill be watching to see if there is safe-haven buying of U.S. bonds, a sell-offin the euro or further declines in equities, all of which can affect preciousmetals.
Oneway or the other, “outside markets are going to be driving gold,” Grady said.
“Anytime you see uncertainty - and especially uncertainty with a currency - you seean initial pull for people to go in and buy gold,” Grady said. “But the problemis - what is that going to do to the U.S. dollar? That is going to be gold’sproblem. If you see the U.S. dollar rally strongly against the euro, I thinkit’s going to be hard for gold to rally.”
Safe-Haven Buying Likely If Equities Tank
Italy has faced political uncertainty since March elections, with no coalitiongovernment formed despite protracted talks. There is a power struggle amonglawmakers who oppose and favor participation in the European Union. There is aperceived risk that President Sergio Mattarella could dissolve Parliament,meaning yet another election, with European news organizations saying thiscould happen as early as July. If so, this could improve prospects forso-called Euroskeptics, meaning any election could end up being a referendum onthe euro. This has left investors on edge, particularly if Italy rejects theeuro and denizens of other nations get the same idea. Further, Italy’s economyis the third largest in the euro zone but has been anemic, with the countryalready heavily in debt.
“Ultimately,if we are under some sort of contagion, gold will be an asset that willoutperform,” said Bart Melek, head of commodity strategy with TD Securities.
Thisespecially would be the case if equities sell off, he said.
Conversely,gold prices could ease if the Italian political situation is resolved without anydanger of a euro-zone breakup and appetite in risk markets improves, Meleksaid.
PhilFlynn, senior market analyst with at Price Futures Group, figures gold could beslip if the turmoil lasts only a short time but underpins the dollar and hurtsthe euro.
“Butif we do start to see the worst-case scenario, where Italy looks to get out ofthe euro, that could create a risk-off scenario that brings gold back,” Flynnsaid. “But that is a story for down the road.”
Shouldthere be heavy safe-haven flows into the U.S. Treasury market, this could alsoend up helping gold, observers pointed out. As the price of bonds rise, theyield falls, which tends to help gold, and vice-versa. In fact, rising Treasuryyields had been one of the main factors undercutting the precious metal earlierthis month, when gold hit its weakest level of 2018.
“Willpeople be running to U.S. Treasuries, or will they not?” Grady askedrhetorically. “That’s why gold is sitting here right now and waiting for areaction.”
Dollar Strength CouldCurb Gold Gains
Golddid in fact initially draw safe-haven buying during the most recent leg ofpolitical uncertainty, Grady said. He pointed out that preliminary data showthe number of open positions in Comex gold futures rose Tuesday, which was likelyfresh bullish positions.
“Butonce the dollar started rallying, you saw the euro sell off, and gold followedthe euro,” Grady said.
ComexAugust gold rallied as high as $1,311.30 an ounce on Tuesday before fallingback and finishing the day at $1,304.10. The metal is not far above that so farWednesday, trading at $1,305.90 as of 10:48 a.m. EDT.
Still,even if gold does not benefit in U.S. dollar terms, the precious metal may wellrise against the euro. This happened at times back during the Greek debtcrisis.
Therewas increased risk aversion on Tuesday, when the Dow Jones Industrial Averagesold off sharply, which led to buying of so-called safe havens.
“These[safe havens] included gold, though only gold priced in euros,” Commerzbanksaid. “At its peak, it gained by 1.6% or ?,?18 to reach over ?,?1,130 per troyounce for a time, its highest level in nearly a year.”
However,Commerzbank added, there was “no one-way street” for gold prices, as the metalalso reacted to fluctuations in yields on Italian government bonds - inparticular the yield spread between 10-year Italian and German governmentbonds.
“Goldmarked its high at around midday yesterday when the yield spread climbed toover 300 basis points,” Commerzbank said. “Subsequently its gains dwindled awayalmost entirely because the yield spread narrowed significantly again. It thenwidened once more in late trading, driving gold back up again. While thepolitical uncertainties in the euro zone continue or even increase, gold shouldremain in good demand as a safe haven.”
By Allen SykoraFor Kitco News
Follow @AllenSykora
asykora@kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.