By Debbie Carlson of Kitco News www.kitco.com
Escalating tensions between North and South Korea and pressuring commodities and lifting Gold on Tuesday, which comes at a time when the world is already jittery over the economic crisis in Europe.
Industrial commodities such as crude oil, copper, Platinum and other resources are coming under pressure, as are equity markets. Gold is benefitting from safe-haven buying, with spot prices $1,198 an ounce. The dollar is also up on flight-to-quality buying. Another sign of investors piling into perceived safety was that the U.S. Treasury Tuesday sold its two-year notes at a record low yield, according to Marketwatch.
Relations between the two countries have deteriorated since March when a South Korea warship was sunk, killing all crew members. A multinational panel said the ship was destroyed in an attack by North Korea. Overnight, a group in North Korea said that country’s leader, Kim Jong-Il has told its military to prepare for combat – news that rattled equity markets across the global. Tuesday morning, the New York Times reported that South Korean has redesignated the North as its archenemy – something it has not done since 2004 - and the North severed its few remaining ties with the South.
The new low in Korean relations comes on the heels of new worries out of Europe as the continent’s economic crisis just won’t go away. Spain’s seizure of a regional bank Monday and German’s decision Tuesday to widen its ban on naked short-selling continue to leave the markets ill-at-ease.
George Gero, vice president at RBC Capital Markets Global Futures, said gold has priced in this latest round of saber-rattling by the Korean countries. “Korea is in the market. Should (tensions) escalate, we could see gold go higher,” he said.
Gero said Tuesday’s weakness in the securities markets and industrial metals like platinum, Palladium and Copper reflect the poor economic outlook.
In the futures market, Gero said gold saw a bump early on because it is options expiration for the June Comex contract, which resulted in short covering. He said there was little selling of gold for margin-account selling, which sometimes occurs when fund managers sell a profitable position to shore up losses elsewhere. “Fund managers aren’t selling gold because its one of the few profitable assets,” he said.
Interest in gold is not only coming from the exchange-traded fund side, but also in the form of coin sales. Barclays noted Tuesday that the US Mint said Gold coin sales reached 158,000 ounces in May so far, which is more than double year ago. “Similarly to the gold ETP demand, coin sales had started the year on a softer note, falling year over year for the first four months but have seen a sharp reversal in May,” they said.
Gero also said much of the action in gold is rolling of positions forward from the June contract to August and December positions ahead of first notice day Friday.
Adrian Day, principal of Adrian Day Asset Management said investors’ positive view toward gold is helping it as much as the news cycle. “Clearly there are a lot of reasons to own gold and they’re not going away,” he said.
Day said that if the situation with the Koreas escalates, gold could see another $50 added to its price, but doesn’t see an all-out war. “I’m not a geopolitical analyst, but North Korea is not in a position to fight and China won’t want them to,” he said.
If tensions between the two countries relax, Day said gold could pull back $10 or $20 from its current price.
Gero put support for gold futures at $1,175 and resistance at the nominal all-time high of $1,250, which he said will be a temporary top.
Some market watchers wondered if gold’s reaction Tuesday to the Korean news and the latest woes in Europe was subdued and a sign of poor performance by the yellow metal. Yet Day said the gold’s current action isn’t out of character. Seasonally the late-May to July timeframe is a weak time for the gold market. Also, he said gold is still sorting out the price spike from $1,180 to $1,250. “We moved far above the trend, so we were overdue a correction,” he said.
He also said the type of buying that is coming into gold – the safe-haven type buying rather than speculative buying – is also reflected in gold’s action.
More and more people are coming to the conclusion that it’s not just Greece or half of Europe (that has debt problems). Half of the world has a problem, including the U.S., the U.K. and Japan…. There are a lot of reasons to own gold, not just as an alternative to the euro, but to all currencies,” Day said.
By Debbie Carlson, contributing to Kitco News; dcarlson@kitco.com
