The crisis in the Ukraine and fears of China’s economy slowing are vaulting gold prices higher as investors take a shine to hard assets in times of economic uncertainty, gold analysts say. The spot gold price has rallied 15 percent so far this year, a glittering turnaround given last year’s 28 percent meltdown. It closed at $1,383 an ounce, a six-month peak, in New York trading Friday.
“In my view, though we will never know, the rally was beginning to run out of steam until the Ukraine situation put a strong bid under gold and continues to drive it higher,” Adrian Day, said in an email.
The founder of Adrian Day Asset Management in Annapolis, Md., has $125 million in assets under management and sub-advises the EuroPac Gold Fund (EPGFX). The fund with $38.5 million in investor assets returned an eye-popping 30 percent year to date, according to Morningstar.
“Geo-political rallies tend to be sharp and relatively short, but the results of the referendum in Crimea and Russia’s subsequent action (and the U.S.’s reaction) are likely to drive gold for the next week or two,” Day added.
The people living in Ukraine’s Crimea region are voting in a referendum Sunday whether to join Russia or remain an independent state in the Ukraine. A majority of the region’s population is ethnic Russian and is therefore very likely to vote yes on joining Russia.
The US and Ukraine contend the vote is illegal and has called on the international community to reject the outcome. Russian corporations are yanking billions of their holdings in foreign banks on worries that US sanctions could leading to a halt in assets.
“Gold loves the smell of blood,” Janice Dorn, M.D., Ph.D., a gold trader and author of Mind, Money & Markets. “This is what has been happening as international tensions increase, the US continues to threaten sanctions against Russia, the possibility that Russia and China may ban together as trade partners.”
Given that the global economy is so interconnected, there is no way for the entire world avoid economic stress from the crisis, says Miguel Perez-Santalla, vice president of business development at BullionVault, an online precious metals dealer.
“The Crimea/Russian/Ukraine situation has more than strained the relationship between the US and Russia,” Perez-Santalla said in an email . “The threat of economic sanctions against Russia will also cause hardship on Europe and will most likely then reach us.”
Aside from the Ukraine, evidence of a slowdown in China’s economy has also served as a catalyst in vaulting gold prices higher, says Perez-Santalla. The most recent economic data releases from the world’s second-largest economy suggest it started to slowdown in fourth quarter 2013 worsened in the first quarter. Growth in industrial output, retail sales and investment all tumbled to multi-year lows, according to IHS Global Insight.
SPDR Gold Shares (GLD) outshined the stock market this year, rallying 15 percent as of March 14 while the SPDR S&P 500 ETF (SPY) is flat. On a 12-month basis, gold lost 13 percent while the SPDR S&P 500 climbed 20 percent. As the world’s largest-exchange traded fund physically backed with gold, SPDR Gold Shares holds $36 billion in assets.
Market Vectors Gold Miners ETF (GDX), the largest fund by assets tracking gold miners’ stocks, surged 31 percent year to date. It has outperformed all other industry categories on the stock market this year. But it has collapsed 25 percent on a 12-month basis.
In addition to China and the Ukraine, the upcoming Federal Reserve monetary-policy meeting scheduled for Tuesday and Wednesday will also be closely watched for vaulting the gold price higher or lower. The Federal Reserve is expected to stay the course in tapering its monthly bond-buying program, known as quantitative easing.
By Trang Ho
Adrian Day, founder of Adrian Day Asset Management
Miguel Perez-Santalla, vice president of business development at BullionVault
Janice Dorn, M.D., Ph.D., author of Mind, Money & Markets
IHS Global Insight (report)