Commodities | Jul 19 2006
By Greg Peel
Gold closed at US$631.20/oz last night representing what is now a significant pullback from Monday’s highs around US$675/oz. This is deemed to be due to profit-taking following some easing of rhetoric from Israel, as well as a preference for the safe haven of the US dollar.
Gold is copping it from all sides at the moment. Having sailed through US$600/oz post-correction on the back of a weaker US dollar, poor US economic outlook, and your common or garden geopolitical tensions (Iran, North Korea, Israel-Palestine) it has stumbled in its charge due to conflicting factors. Such factors will only serve to ensure volatility remains rife for the time being.
The ferocity of Israel’s counter-attack against Lebanon, or specifically Hezbollah, took everyone by surprise. While gold rallied predictably initially, it came under pressure when the flood of foreign money hit the US dollar. It seems that this is the preferred safe haven for at least the time being.
A preference for the dollar contrasted the mood coming from US bourses this week as stock downgrades and warnings of an economic slowdown pervaded. Not helping was the soaring oil price, which responded to the Middle East conflict.
The push-me-pull-you forces on the dollar were exacerbated last night by a stronger than expected PPI number, which strengthened the argument for another US rate rise. This, of course, is bullish for the dollar.
Now there has been a hint from Israel that its specific determination to wipe out Hezbollah once and for all might be tempered – and hence the bombing will stop – if they just give back the two soldiers and stop counter-bombing.
This doesn’t seem like a major step forward, particularly as Israel has now (a) suggested it does not want the UN involved, and is prepared to invade Southern Lebanon by ground and (b) has accused Iran of being behind the kidnapping in order to divert attention away from its nuclear program at a time when the G8 was meeting.
It is the world’s fear that Iran will enter the conflict.
Nevertheless, there was positive reaction to a possible ceasefire allowing the oil price to fall and US stock markets to rally. This again had a downward effect on gold as tensions appeared to ease.
This pullback may have further to run, but gold observers suggest it is not a case of the end of a bull market. It was a quick run up to US$675/oz and profit-taking was not a surprise. In the greater macro scheme of things the view is still positive for gold.
All eyes will be focussed on tonight’s CPI figure release in the US. Where that comes in will be a significant determinant for the gold price, the US dollar, and US stock markets.
CPI aside, the Middle East situation may subside a little, but simmering tensions can clearly reach boilover in a flash once more.