Domestic and international events coerced gold downward to a 7-week low earlier this week, with other precious metals close in tow. However, prolonged uncertainty concerning the future of the European economic recovery and long-term investment strategies increased bid price levels later in the week.
The weakening Euro was a major mover of gold prices this week. This came Wednesday after the International Industrial Bank (the Russian juggernaut controlled by lawmaker Sergei Pugachyov) announced it would be defaulting on €200 million (≈ $252 million) worth of bonds that matured Tuesday. The lender has 5 business days from this past Tuesday to repay the principal and interest before the default technically occurs. Unfortunately, this grace period did not prevent waves of global investors from pulling funds out of Europe. The news of possible default spread fast enough to weaken the Euro by .6% on Wednesday alone. The comparative appeal of the Dollar convinced investors to reallocate capital from both the Euro and gold.
Also bidding up dollar values this week was an official announcement by China’s State Administration of Foreign Exchange (SAFE). SAFE’s website said that China had no interest in dumping U.S. assets, which effectively quelled fears on international markets that China would use their $2.4 trillion in foreign reserves as an “atomic weapon” against investment targets. This news further supported the Dollar’s climb this week, and kept gold down.
SAFE also explained they would not be actively pursuing gold as a means of investment. “Gold is globally recognized as a store of value and can be used for urgent payment, but there are some limits to investing in gold, and it cannot become a main channel for investing our foreign exchange reserves,” said the website. “If we buy a large amount of gold, it will push up global gold prices…which will eventually hurt the interests of Chinese consumers.”
Drops earlier in the week did not continue through Friday as gold, along with other prominent precious metals, turned around on Thursday and resumed their upward march.
• Gold: Gold hit a 7-week low Wednesday at $1,185.40, most likely in direct response to the strengthening of the greenback. The yellow metal bounced back Thursday and broke the $1,200 psychological barrier Friday, trading as high as $1,214.80. Old and new investors came into the market as low prices allowed them to earlier in the week. This was followed by an optimistic comment by Deutsche Bank AG predicting that gold would hit $1,400 by the fourth quarter.
• Silver: As gold dropped earlier in the week, silver was jolted upward .8%. This was likely due to the fact that the dollar was not yet exhibiting advantageous investment potential over the noble metals. When it did silver took a small dip, dropping below $17.70 Wednesday. Ultimately prices rebounded, trading as high as $18.25 Friday.
• Palladium & Platinum: Both Palladium and Platinum followed silver’s pattern this week with respective 3.2% and 1% increases Tuesday. Investors pulled out the next day and prices dropped marginally Thursday.
An air of uncertainty has permeated precious metals over the past two weeks. While gold, silver, platinum and palladium have measured unprecedented gains, these increases have proven time and time again to be subject to dramatic, international movements in related assets. Smart money is buying precious metals at lows like the ones we saw earlier this week, and waiting to make a move.