Traditionally, the value of gold fluctuates with market sentiment. In times of military or geopolitical unrest, traders and investors buy gold and sell the more risky currencies to seek refuge in the safe haven asset. Conversely, when all is well in the markets and traders’ and investors’ perception of a nation’s economic outlook is positive, gold generally depreciates versus the more risky assets.
The yellow metal has gained strength for the majority of the year, sustaining a considerable uptrend, likely fuelled by the ongoing situation in Crimea, gold topped out at 1,392.00 on March 17. Since then, the XAUUSD has traded to two month lows at 1.277.26, and now sits slightly higher at 1,299.44. A number of fundamental factors will likely decide the medium term outlook for the price of the precious metal.
The first is the aforementioned situation in Crimea. The tension looks to have reduced, as Putin withdrew troops from the Ukrainian border, and the markets look to have responded accordingly. However, the sanctions on Putin’s Russia remain, and are set to be tightened for as long as Russia lays claim to Ukraine. At some point, one or the other parties will have to compromise, something that, at present, neither seems willing to do.
The second is the potential for a slowdown in China. As disappointing economic data continues to pour out of the Asian superpower, global markets become increasingly concerned of the ripple effect such a slowdown might create. China has large levels of foreign investment across a huge number of industries worldwide, and a slowdown would stem capital flow to these investments. This could switch sentiment, and drive up the price of gold.
Finally, Janet Yellen recently hinted at an interest rate hike. This would, in the medium term at least, afford US dollar safe haven status. Such an event would likely redirect the capital of risk averse investors from gold to the US dollar, and in turn, drive down the price of the precious metal.
To contact the reporter of this story; Samuel Rae at Samuel@forexminute.com