US NATIONAL DEBT

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Russia Drives the Gold Price – Briefly

March 5, 2014

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital, had the following comments on the current gold-market situation and outlook: 

Russian saber-rattling sent gold over $1,350 an ounce earlier this week, its highest price in four months.  But, contrary to many press reports, it was neither safe-haven demand nor physical buying that fueled gold’s short-lived price advance. 

Instead, it was institutional speculators and short-term traders – among them the trading desks at some of the gold-dealing banks – who rushed reflexively to buy gold futures and other “paper gold” derivatives . . . and then sold quickly to take profits as the crisis seemed to abate. 

Meanwhile, buyers in China and India, the two largest physical markets in the world, continued to dance to their own market fundamentals, virtually ignoring the geopolitical drama unfolding in Europe. 

It was the risk of war and the possibility of Russian troops storming into the Ukraine that triggered the rush into paper gold . . . and it was Russian President Vladimir Putin’s assurance that there would be no imminent invasion that led to swift profit-taking and a quick price decline back to the $1,330 area. 

If Russia resumes its saber-rattling, the Ukraine situation may continue to drive the gold price in the days immediately ahead. 

We are reminded just a little bit of gold’s glory days when the metal’s price served as a barometer of global geopolitical anxiety – but, so far, the rise in anxiety has been rather muted . . . and so, too, has been the past week’s rise and fall in the gold price.

There is certainly the potential for the crisis in the Ukraine to flare-up again – bringing with it, another round of dramatic gold-price action. 

But typically, geopolitical developments tend to have a short-lived impact on the price of gold – and we’d expect this to be the story once again, unless, of course, the proxy war between Russia and the West over Ukraine’s future takes an unlikely, more confrontational, turn. 

Asia has its own geopolitical hot-spot with China and Japan at odds over their opposing territorial claims to a handful of uninhabited islands in the South China Sea.  Naval operations in nearby waters by both countries could, even unintentionally and unpredictably, escalate tensions with implications for gold

Assuming that Russian forces continue to stand down, the market will soon return to its former state of affairs . . . with Chinese and Indian gold demand, the U.S. economy and monetary policy prospects, and institutional investment interest most likely to call the tune in the months ahead. 

Most of all, institutional traders and short-term speculators will have their eyes on the upcoming U.S. economic indicators for more definitive evidence that the economy is – or is not – enjoying a pick-up in business conditions. 

In my book, the data will be disappointing to all of us wishing for a robust economic upswing . . . and increasingly difficult to blame on the weather!  Sooner or later the stumbling economy – and persistently weak employment indicators – will call into question the Fed’s policy of incremental tapering.  This, not the Russian scare in Eastern Europe, could be the catalyst to drive gold much higher.

About Rosland Capital

Rosland Capital LLC is a leading precious metal asset firm based in Santa Monica, California that buys, sells, and trades all the popular forms of gold, silver, platinum, palladium and other precious metals. Founded in 2008, Rosland Capital strives to educate the public on the benefits of investing in gold bullion, numismatic gold coins, silver, platinum, palladium, and other precious metals. Rosland also helps people who wish to protect their wealth by including a gold or precious metal-backed IRA in their asset portfolio. Click here for more information.

About Jeffrey Nichols

Jeffrey Nichols, Managing Director of American Precious Metals Advisors and Senior Economic Advisor to Rosland Capital, has been a leading precious metals economist for over 25 years. His clients have included central banks, mining companies, national mints, investment funds, trading firms, jewelry manufacturers and others with an interest in precious metals markets. Read more news pieces by Jeffrey Nichols.