3 Forces To Support Gold Prices

Gold posted its highest close in two weeks, edging closer to the $1,300 per ounce mark as investors fled to the safe haven as geopolitical unrest and a falling euro had investors shunning risk, painting a prosperous road for the future of the precious metal.

Concerns in the Euro Zone continue to widen as Spain’s debt has been the latest to witness a downgrade.  Ratings agency, Fitch, downgraded the nation’s debt from an AAA to AA.  A further blow came to Europe when the European Central Bank announced that euro-zone banks may have to write off loans totaling $240 billion this year and next, which could result in tighter credit markets and slower economic growth.  Additionally, rumors have been floating that France’s debt rating will be the next downgrade in the region, resulting in yet another blow to a fragile region.  The last force that is adding to the uncertainty in Europe comes from the resignation of Germany’s President, Horst Koehler.

On the geopolitical forefront, tensions between South Korea and North Korea and the recent Israeli attacks on the flotilla of aid relief ships, which broke a blockade to bring supplies to Gaza continue to provide price support.  This ramp up in global violence aided in the precious metals gains, as its appeal as a hedge against a financial and military crisis continues to glimmer.   

In addition to the aforementioned, gold will likely witness further price support from concerns of sustainable global economic growth.  In China, the Chinese Purchasing Managers’ Index (PMI) read 53.9 in May, well below expectations ; indicating that China’s policies to slowdown its credit fueled economic growth is working and could potentially hinder the chance for tighter monetary policy going forward.  In India, water scarcity could potentially hinder economic growth.  In the US, unemployment levels continue to remain elevated, companies remain reluctant to hire full-time employees and the massive oil spill in the Gulf of Mexico could potentially impact energy prices and the country’s overall economic growth.   

In a nutshell, as long as financial uncertainty prevails, geopolitical tensions arise and potential threats which could hinder global economic growth are present, gold is likely to continue to see positive price support. 

Some ways to play the precious metal include:

  • The SPDR Gold Trust (GLD), which is the world’s largest gold ETF, and boasted record holdings of 1,267.93 metric tons at the end of last week.  GLD closed at $119.91 on Tuesday.
  • The Market Vectors Gold Miners ETF (GDX), which is an equity play on gold.  GDX includes Barrick Gold Corporation (ABX), Newmont Mining (NEM) and AngloGold Ashanti (AU) as its top holdings.  The ETF closed at $49.81 on Tuesday.
  • The PowerShares DB Gold Fund (DGL), which utilizes futures contracts in gold.  DGL closed at $43.74 on Tuesday.

 Although forces are suggesting positive price support for gold, it is equally important to keep in mind the risks that are involved with investing in such a commodity.  To help mitigate these risks, the use of an exit strategy which identifies specific price points at which an upward trend in gold could come to an end is important.

According to the latest data at, these price points are such: GLD at $115.38; GDX at $47.58; DGL at $41.92.  These price points are reflective of market conditions and fluctuate on a daily basis.

Disclosure: Long DGL

Categories: ETFs, Latest Weekly News

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