REUTERS/K. Sathya Narayanan

Gold slips from near seven-year highs on lull in U.S.-Iran tensions

January 7, 2020

“Gold prices retreated on Tuesday from near seven-year highs reached in the previous session as investors took profits in the absence of new developments in the tense situation between the United States and Iran. Deficit-hit palladium meanwhile hit another record peak on the back of prolonged supply constraints in the market.  Spot gold was down 0.1% at $1,564.31 per ounce as of 1257 GMT, having fallen as much as 0.7% earlier in the session. It touched its highest since April 2013 at $1,582.59.

U.S. gold futures were 0.2% lower at $1,566.00. ‘There is nothing fundamental going on here, it is just a reaction to yesterday’s price movement. Investors are looking at the other side of the coin and taking some profits,’ ABN Amro analyst Georgette Boele said. The market seems a little more relaxed about the situation in the Middle East, she added. Prices surged on worries about an armed conflict between the United States and Iran after a U.S.-authorised drone strike killed a top Iranian military official on Friday. With both sides exchanging threats of retaliation, a senior Tehran official said on Tuesday Iran had been considering 13 ‘revenge scenarios’ in retaliation to the air strike.”

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CNBC/Elliot Smith

3 reasons why gold could rally for the rest of the year, according to commodity strategists

January 7, 2020

Reasons for Gold to Rally“A combination of continued geopolitical risk, a weaker dollar and negative real rates would continue gold’s rally through 2020, commodity strategists anticipate. However, there is some disagreement over the extent to which geopolitical factors will continue to be supportive for the precious metal. Gold prices rallied to a seven-year high after tensions escalated in the Middle East following the U.S. killing of top Iranian military commander Qasem Soleimani, as investors flocked into typically safe assets, with oil and bond prices also surging.

As well as geopolitical risk, however, macro factors are also boosting gold’s appeal as a hedge against uncertainty. A softened dollar and a persistent negative rate environment are chief among these gold-supportive trends. Since gold is denominated in dollars internationally, weakness in the greenback pushes up gold prices and vice versa. Meanwhile negative real interest rates, in which the inflation rate is higher than the nominal interest, means that creditors will be losing money and are therefore more likely to park their money in gold.”

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KITCO NEWS/Allen Sykora

UBS sees gold prices averaging around $1,600/oz in 2020

January 7, 2020

UBS Gold Price Estimate“UBS said the current backdrop is ‘quite supportive for gold,’ looking for the metal to average around $1,600 an ounce this year, although analysts also offered caution about the early-year gains. Heightened U.S.-Iran tensions on Monday sent gold to a roughly seven-year high, before the metal pulled back some. ‘Macro factors are boosting gold’s appeal as a hedge against uncertainty and a diversifier for investor portfolios,’ UBS said. ‘Seasonally, January also tends to be a strong period for gold due to a combination of physical demand in China ahead of the Lunar New Year holidays and investor allocations are built as portfolios are rebalanced at the start of the year. Our base case is for gold to trade through and average around $1,600 this year.’

Still, analysts said investors need to consider several other factors, including the thin liquidity early in the year, which can exaggerate price moves. ‘Reading too much into recent moves and extrapolating them remains tricky at this stage,’ UBS said. ‘Second, we are cautious about the volatility and sustainability of the impact of geopolitical uncertainty on gold prices. Further escalation would likely see a ramp-up in safe-haven demand for gold, but the bar for persistent and significant price responses tends to increase as the uncertainty drags on. Conversely, we expect de-escalation to swiftly unwind gains.’ There would be a more sustained impact on gold if the uncertainty filters through to inflation and growth, the bank continued. ‘That said, lingering geopolitical uncertainty does further strengthen the case to include gold in a diversified portfolio.”

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YAHOO FINANCE/Sam Ro

The Iran crisis could bring a bigger economic problem than surging oil prices

January 7, 2020

Iran Crisis“The intensifying U.S.-Iran conflict is dominating headlines, and it’s certainly something investors shouldn’t be ignoring. While the U.S. economy has limited direct exposure to Iran, Iran is a big player in the oil market and has the capacity to do things that could cause oil prices to spike. ‘It is a stylized fact that oil price shocks tend to lead recessions,’ Credit Suisse economist James Sweeney said on Monday. ‘Five of the past six recessions were preceded by a sharp increase in oil prices.’ But the world has changed greatly since the last recession. Consumer spending on energy is at historical lows, accounting for just 2.3% of personal consumption expenditures, down from about 6% in the early 1980s. This limits the impact surging oil prices could have on the economy. Higher oil prices may also spark activity in the country’s massive domestic energy sector.

‘Higher oil prices do not have as much of a slowing effect on the U.S. economy as they did years ago,’ Wells Fargo chief economist Jay Bryson acknowledged on Monday. ‘However, the uncertainty that the crisis could impart could potentially be more meaningful.’ Uncertainty is what makes growing businesses delay investment. Uncertainty causes gainfully employed consumers to second guess big purchases. And uncertainty causes investors to refrain from buying stocks. And sometimes even sell stocks. The prospect of a major military conflict isn’t exactly confidence-inducing.”

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MARKET WATCH/William Watts

Why the dollar doesn’t always act like a haven when geopolitical tensions rise

January 6, 2020

Dollar is not always a haven“One of these things is not like the other: Treasurys, gold and the U.S. dollar. Good for you if you picked the dollar. Unlike those other two assets, the U.S. currency didn’t seem to attract much buying interest as investors shunned global stocks at the end of last week and went looking for safety following a U.S. military strike that killed a top Iranian military commander and heightened Middle East tensions. ‘Increased tensions between the U.S. and Iran could lift the dollar — at least against non-major currencies — although we tend to see these sorts of geopolitical rows favoring the yen and Swiss franc first and foremost,’ wrote Steven Barrow, head of G-10 strategy at Standard Bank. On Friday, gold jumped and Treasury prices soared, yanking down yields, as global equities sold off in the wake of the strike.”

“‘When — geopolitical tensions arise that do not tighten liquidity conditions, the dollar is more likely to fall against other major havens, such as the yen and Swiss franc, and will probably trade sideways against the euro,’ said Barrow, who expects the dollar to lose around 5% to 10% in broad trade-weighted terms in 2020. A weaker buck appears to be the consensus call heading into 2020, though skeptics contend that factors that have previously frustrated dollar bears continue to underpin the currency. These include a domestic economy that still outshines its international peers as well as higher U.S. yields, despite the Federal Reserve’s series of three rate cuts last year.”

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CNBC/Jeff Cox

Ben Bernanke says the Fed shouldn’t rule out using negative interest rates

January 6, 2020

Negative Interest Rates“The Federal Reserve should consider negative interest rates as a potential weapon to fight future economic downturns, former central bank Chairman Ben Bernanke said. In a blog post released over the weekend, Bernanke cited the benefits of at least keeping the option alive to take short-term rates below zero. Doing so, he said, would give the Fed flexibility at a time when its policy toolkit is limited. ‘The Fed should also consider maintaining constructive ambiguity about the future use of negative short-term rates,’ Bernanke said in a post released at the American Economic Association conference in San Diego. The option ‘would provide useful policy space’ particularly with historically low rates already in place.

The comments come as Fed officials are weighing how they will respond to the next crisis while simultaneously evaluating the extraordinary tools they used during the last one. Bernanke helped pioneer the use of near-zero interest rates combined with quantitative easing, the aggressive asset purchases that pushed the Fed’s balance sheet past $4.5 trillion as it sought to pull the economy out of the Great Recession. Bernanke is not the only central bank authority to talk about negative rates.

Former Chairman Alan Greenspan told CNBC in September that it’s ‘only a matter of time’ before below-zero yields come to the U.S. When she was chair, Janet Yellen said in a letter that she would ‘would not completely rule out the use’ of negative rates.”

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