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A week in gold : Political risk revives to spark rally

Published: 02:30 14 Jun 2014 EDT

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Gold’s recent correlation with equity markets and its traditional inverse relationship with the dollar worked in its favour this week.

Concerns over Iraq, the US economy and inflation in Europe prompted a mild pull-back by stock markets form their recent record highs, while mixed US economic data held the dollar back.

Spot gold was trading at US$1,273 after early trading on Wall Street on Friday, a gain of about US$20 on the week.

Traders said the situation in Iraq had caught investors as well as the country’s government by surprise.

Having overrun Mosul in the north, the Sunni islamist group ISIS was reportedly just 60 miles from Baghdad on Friday and vowing to take full control.

Iran has reportedly been asked to send help to the Shia-led Iraqi government, while the US was even said to be mulling an about-turn following its withdrawal in 2011.

Gold has also been helped by mixed economic data from the US with weak retail and slightly worse than expected unemployment claims.

The next meeting of the US Federal Reserve’s interest rate setting committee take place in the coming week and most economists expect another US$10bn cut in the bond buying programme along with more insistence that interest rates will remain low for the foreseeable futures.

The prospect of the start of a bond-buying programme in Europe, which was hinted at by ECB president Mario Draghi last week, has helped to offset some of the unease over the steady tightening of US monetary policy.

Stable gold holdings in exchange traded funds (ETFs) this year compared to 2013 has also helped. Heavy selling through ETFs was responsible for a good chunk the 28% decline in the gold last year.

After a weak start to May holdings have remained fairly stable at c1,725 tonnes with a market value of some $70bn, according to Citigroup,

One thing that has been missing from the gold market recently has been the strong physical demand that helped support the price last year and at the start of 2014, but the World Gold Council remains confident this will be a factor again befoer the year ends.

Demand from China surged to more than 1,200 tons in 2013, but while not at the level seen in 2013 the WGC is still expecting a healthy 1,000 and 1,100 tons to enter the country.

India could also be important with the WGC expecting demand to pick up after last year’s government restrictions to anywhere from 900 to 1,000 tons. The new government in India expected to look more favourably on gold and especially the jewellery market.

According to Citigroup, “With Asian demand likely to pick-up some steam in the second half of the year —particularly as the growth outlook for India improves—gold positioning could find more support.”

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