Trends Driving Recent Gold Rally Firmly Entrenched

Gold hit a three-month high on Monday, driven by fears over Greece’s ability to pay debts and soft economic data in the US.

The price of gold peaked at $1,232.20 Monday, before sliding a bit on Tuesday. CNBC reports a sharp rise in the euro and indications the European Central Bank may speed its 1 trillion euro ($1.12 trillion) bond-buying program stalled gold’s five-day rally Tuesday. Uncertainty about what the Federal Reserve will do regarding interest rates in its meeting Monday also weighed on the market.

But the long term trends that sparked the climb in gold prices over the last week remain firmly entrenched. The Greek situation appears nowhere near a resolution, and as the Wall Street Journal reports, fears surrounding Greece’s future played a large role in the recent gold rally.

Gold prices carved out new territory as investors refocused on the threat of a potential sovereign debt default by Greece. Athens and its international creditors remain split on the fiscal and economic reforms needed to heal the Greek economy, leaving the door open to a default that could lead to the country to exit the euro. Greece’s current bailout expires at the end of June.”

Investors in Germany have turned bullish on physical gold, indicating they take the situation in Greece quite seriously. Last week the Telegraph reported, “German investors have piled into gold bars and coins in the first quarter of the year as a hedge against European Central Bank policy and the threat of a Greek default bringing down the eurozone.” Alistair Hewitt of the World Gold Council said:

This was the strongest start in Europe for gold coins and bars that we have seen since 2011… German investors are fretting over the ECB, Greece and Ukraine.”

Soft economic data in the US and speculation that the Fed will not raise interest rates in the near future also provided upward pressure on gold prices, according to a Reuters report.

Spot [gold] prices rose 3 percent last week, their biggest weekly climb in four months, after recent downbeat readings of the US jobs market, retail sales and consumer sentiment led analysts to conclude that an imminent rate increase was unlikely…

“’The US data has been a lot weaker than expected, which has calmed investors who had been expecting a June or July rate hike,’ Capital Economics analyst Simona Gambarini said. ‘We’re of the view that September is the most likely date when the Fed will raise rates. If the data continues to be weaker, we would expect gold to react quite strongly.’”

If markets respond in this way when based on mere worries and speculation, imagine what will happen when Greece’s problems actually come to a head, or Wall Street realizes the economy is truly in another recession.

While gold’s rally has slowed for the time being, even institutional investors have issued warnings. On Tuesday, Bank of America Merrill Lynch sent out a warning to investors.

Investors remain trapped in ‘The Twilight Zone,’ the transition period between the end of QE and the first rate hike by the Fed, the start of policy normalization…until (a) the US economy is unambiguously robust enough to allow the Fed to hike and (b) the Fed’s exit from zero rates is seen not to cause either a market or macro shock (as it infamously did in 1936-7), the investment backdrop will likely continue to be cursed by mediocre returns, volatile trading rotation, correlation breakdowns and flash crashes. For this reason we continue to advocate higher than normal levels of cash, adding gold and owning volatility in mid 2015.”

Peter Schiff has been warning that rosy jobs numbers and positive economic data thrown around in Washington DC over the last few months hide a much more dismal picture. In a recent podcast, Schiff said the United States may be on its way into another official recession in 2015.

All of the factors driving the recent gold rally seem firmly set in place, indicating gold remains a solid long-term investment.

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