As an eventful week closes out, what factors will be affecting gold in the near term? First, let's take a look at how precious metals performed for the week ending July 11th:
The week started calmly enough, but a sell-off in the stock market on Tuesday triggered inflows into precious metals. Platinum closed back above $1,500 an ounce on Wednesday, while palladium closed at $870.
A big factor in that was the release of the Federal Reserve Open Market Committee minutes of their June meeting, which revealed that most Fed officials are more than willing to wait before raising benchmark interest rates.
Thursday was a big day, as news that the parent company of Portugal's second-largest bank had missed a bond payment roiled stocks and bonds. Though fears of a European banking crisis had calmed somewhat on Friday, precious metals held on to their gains into the weekend. Both gold and silver gained over 1% for the week.
Factors Affecting Gold Next Week
This may be the most certain factor that will affect gold next week. Hamas has been lobbing new, longer-range rockets into Israel, and Israeli Air Force jets have been bombing targets in the Gaza Strip all week in retaliation. Late Friday, rumors circulated that a rocket was fired from southern Lebanon into northern Israel.
If this was the start of a Hezbollah offensive designed to take pressure off Hamas and split Israeli forces, and not just some random event, things could get very ugly, very quick. Israel has already called up 33,000 reservists in preparation for a ground offensive and house-to-house fighting in Gaza, up from an initial call-up of 20,000. A two-front war with terrorists on opposite sides of the country would lead to Israel taking the kid gloves off and hitting them both with everything it has.
Fed chairwoman Janet Yellen is scheduled Tuesday to give her twice-yearly report to Congress on Fed monetary policy, as required by the 1978 Humphrey-Hawkins Act. This act laid the Keynesian -based foundation for Fed policy. Yellen hasn't quite learned yet how to not go off-script and freak the markets, so anything may happen.
In the meantime, different Fed officials are running around giving differing outlooks on policy. Chicago Fed president Charles Evans, who doesn't vote in the FOMC this year, told an audience that even if the Fed let inflation rise above 2%, it wasn't such a big deal. This reinforces the belief of some analysts that the Fed will wait too long to try and stop inflation, and will fail.
On the other hand, Philly Fed president Charles Plosser, who does vote on the FOMC this year, said that inflation pressure and asset bubbles are growing, and that the Fed should not wait until every one of its goals are met before raising interest rates. Similarly, Atlanta Fed president Dennis Lockhart said he saw the end of ZIRP, the Fed's "Zero Interest Rate Policy," by the second half of next year.
Perhaps all this talk is the Fed playing theater, to reduce what was called "over complacent" behavior by investors in the last FOMC minutes. It does seem like everyone acts like stocks will be a one-way bet forever. Ask yuan traders how that worked out for them.
Contagion Fears/Market Volatility
Panic over Portugal's banking crisis seems to have subsided, but markets are going to be very twitchy over any signs of more sick banks. It remains to be seen if the drops in the stock market last week were profit-taking opportunities, traders being cautious about "holding the bag" if another financial crisis was beginning, or if stocks have finally found their "irrational exuberance" top. (For more on how the current market indicators of a reversal are near all-time highs, check Mark Hurlbert's column on MarketWatch.)
Also at MarketWatch, we read that the correlation between bonds and stocks is spiking, removing the ability of bonds to hedge against a downturn in stocks. What has the least correlation with stocks? Hint: It's yellow and shiny.
The U.S. Dollar
The dollar has been very sickly lately, but any sign of European financial contagion will hurt the euro currency, which makes up nearly half of the DXY dollar index. The British pound, which has been outperforming lately, may also start weakening as the Bank of England gets closer to being the first central bank in the developed world to raise rates. The UK economy has been improving much faster than that of the U.S. and EU.
Since precious metals are traded internationally in dollars, a strong dollar makes it more expensive for foreign buyers to purchase gold. This is not a hard and fast rule, though, as several times this year, gold has gone on a tear while the dollar was rallying. The dollar could still be a factor for gold demand in the absence of stronger events, however.
June and July are the "low season" for gold, so as the summer wears on, seasonal factors will start coming into play to support gold. Even though the new pro-business Modi administration in India did not reduce gold import taxes from 10%, Indians will get their gold, by hook or by crook, when the fall festival and wedding season arrives.
With the European Central Bank embarking on easier money policy, and the Bank of Japan printing yen at a rate that would make Ben Bernanke blush, the odds are that real interest rates (interest rates minus inflation) will remain negative for several months more.