Currency Crisis Breathing New Life Into Gold? - Analysts
(Kitco News)- A Turkishcurrency crisis that could spread to Europe is breathing a bit of life intogold as a safe-haven asset. But, analysts are still concerned that the yellowmetal faces tough competition against the U.S. dollar.
BillBaruch, president of Blue Line Futures, said in an interview with Kitco Newsthat the gold market could be close to reversing its downward trend asinvestors are starting to see value at current prices.
Thegold market is preparing to see slight gains on the week, ending a four-weeklosing streak. Comex December gold futures last traded at $1,221.70 an ounce,virtually unchanged from the previous week. However, many analysts note thattechnically, the gold market is still in a downtrend as prices hover near theirrecent 12-month low.
“Goldis still down, but we think a tailwind is building in gold,” said Baruch. “Wesee value at these levels and we are buyers right now, protecting our positionwith put and call options.”
Renewedbuying interest in gold picked up Friday as the Turkish lira fell to historiclows overnight. The U.S. dollar is up more than 22% against the lira.
“Thetrigger seemed to be the lack of credibility in the government's response asinvestors await officials to elaborate on the outline of the ‘new economicmodel’ provided yesterday,” said currency analysts at BBH.
Turkey’scurrency crisis could weigh on the entire Eurozone. According to reports, theECB has identified three major banks that have exposure to Turkey: Spanish BankBBVA, Italian Bank UniCredit and French bank BNP Paribas.
Gold’ssafe-haven appeal can be seen in Europe as the yellow metal is up 1% againstthe euro Friday. For the week gold is up 1.4% against the euro.
AndrewKenningham, chief global economist, said that Turkey’s currency crisis hasdeveloped as a result of too loose fiscal and monetary policy, “resulting inrapid growth but also a build-up of vulnerabilities.”
However,he added that while Europe has the most significant exposure to Turkey, risksto global growth remain relatively small.
“Turkey’seconomy accounts for just one percent of the world economy, at market exchangerates, which is slightly smaller than the Netherlands, for example,” he said.“Nonetheless... Turkey’s troubles are a further headwind for the euro and are notgood news for EM assets either.”
AdamButton, currency strategist at Forexlive.com, agreed that there are signs ofrenewed interest in gold, but he said that the market still faces manyheadwinds.
“Goldis up Friday and you just needed half of the world to collapse to boost it,” hesaid. “I would have liked to see a better finish this week given all that ishappening in currency markets. However, it does seem that the odds are shiftingfor a better bounce in gold.
“Thisis a good time for the bulls to make their stand,” he said. “I don’t think thiscurrency issue is going to go away anytime soon so we could see some more buyingnext week.”
Gold Still Has To FightAgainst A Strong U.S. Dollar
WhileButton sees potential for higher gold prices in the near-term, he added thatthe market remains weak.
“Ithink I would rather short gold on rallies than buy dips at this point,” hesaid. “Ultimately, the Federal Reserve is going to keep raising interest ratesand the U.S. dollar is going to remain strong.”
Buttonadded that the U.S. dollar remains an attractive safe-haven as investors seethe U.S. as the main pillar of strength within the global economy.
Baruchalso noted that the U.S. dollar still has the potential to move higher. He explainedthat the greenback looks attractive as the “neighborhood” of other globalcurrencies looks scary. In particular, the euro is down 1% against the U.S.dollar for the week; EUR/USD last traded at 1.1420.
Optimism Growing In Gold AsMarket Still Stuck In A Downtrend
Althoughgold prices continue to hover near its recent 12-month lows, optimism isstarting to grow that an impending bounce is just around the corner.
Ina recent interview with Kitco News, Chantelle Schieven, head of research atMurenbeeld & Co recommended that investors pay more attention to gold asthe market is significantly oversold.
Whileshe couldn’t rule out further weakness in the near-term, she said that her firmdoesn’t expect gold prices to break last year’s lows. She added that they don’tsee gold going below $1,000 an ounce.
“Idon’t think interest rates are going to go high enough to push gold below$1,000 an ounce,” she said. “I think we would be hard-pressed to push goldbelow last year’s low.”
Theresearch firm is expecting gold to catch a bid towards the end of the year asinvestors start to worry about the U.S. government’s growing debt.
Schievenadded that the U.S. government could also start to put pressure on the U.S.dollar by the end of the year as a strong dollar will hurt economic growth andcorporate earnings.
Key Levels To Watch
Althoughgold is attracting some buyers, investors continue to keep an eye on the recentlows at $1,205 and the $1,200 levels. If that goes many see prices dropping to$1,180 an ounce.
JasperLawler, head of global research at London Capital Group, said that he has beendisappointed with the lack of strong conviction in the buy side of the goldmarket.
“Thebuying momentum just doesn’t seem to last very long,” he said. “The $1,205level doesn’t look like it is going to hold,” he said.
Lookingahead, Lawler said that he would need to see a decisive break above $1,220 anounce before he thinks investors are confident that the market has bottomed.
Baruchsaid that he is watching the $1,227 level. He added that a close above that couldspark a short-squeeze rally that pushes prices above $1,250 an ounce.
“Wejust think gold is a good buy at these levels,” he said. “You want to own itnow because with all this uncertainty we could wake up one morning and goldwill be $20 higher.”
Otheranalysts say that $1,236 is critical resistance to watch in the near-term. In arecent interview with Kitco News, Ole Hansen, head of commodity strategy atSaxo Bank said that gold ultimately needs to push to $1,300 to attract newinvestors to the marketplace.
Henoted that even a push to $1,260 an ounce could be seen as a short-term bullishcorrection in a long-term downtrend.
The Final Say
Alleyes will be on Turkey and Europe next week, which could boost gold’ssafe-haven appeal. However, there are also important U.S. economic data on thedocket next week.
Thecalendar heats up mid-week with the release of U.S. retail sales and regionalmanufacturing data.
OnThursday, markets will get important housing construction data and moreregional manufacturing numbers. The housing sector is garnering a lot moreattention as the industry is showing some weakness because of rising prices andrising interest rates.
By Neils ChristensenFor Kitco News
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nchristensen@kitco.comwww.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.