Fed Hike or 'Putin Put'? Factors Affecting Gold

Factors affecting gold
Chris Ratcliffe/Bloomberg via Getty Images
By Matt Clinch | @mattclinch81

The price of spot gold edged towards a two-month low Friday morning as analysts weighed the many factors that have been causing the commodity to trade in a tight range in recent months.

Gold slipped to $1,279 an ounce in morning trade. It had been on a five-day losing streak and was headed for its worst week in five. That trend had turned around by midday London time with the price moving higher as tensions re-emerged in eastern Ukraine. But this could prove to be a brief respite with gold watchers predicting a slight fall in the longer term.

"We think in the next few months we'll get some more downward pressure on gold," Matthew Turner, a precious metals analyst at Macquarie Securities told CNBC on Friday.

John Meyer, a mining analyst at brokerage SP Angel, agreed and believes that the weakness will persist for gold. He expects the commodity to be range-bound for the rest of 2014. "Yes gold is heading south for now," he told CNBC on Friday.

In the 10 years up until last December 2012, gold had surged around 400 percent, with the help of low interest rates, extra Federal Reserve liquidity and concerns over the global economy. In 2013 it lost 30 percent of its value with the Fed beginning to dial back its $85 billion-a-month stimulus program. This year, meanwhile, the precious metal has added 6 percent to its price with a range of factors influencing both speculators and physical gold buyers.

Rate Hike

Gold is often seen as a hedge against inflation and traditionally has had an inverse relationship to interest rates, with demand for the precious metal increasing when rates are low. With the Fed delivering a more hawkish tone in the minutes from its latest policy meeting the price has softened.

Turner said that speculators follow Fed policy closely and were willing to buy gold as the price rose but accentuated the fall when the Fed's policy suddenly changed in 2013.

"The investment money has come out of the market," he told CNBC. "What drives speculation is U.S. monetary policy still and last year we had a shock ... this year we haven't had a shock."


Continued concerns that violence in Ukraine could escalate rapidly has provided some support for the price which is seen as a "safe-haven" trade. Pro-Russian separatists are currently locked in fierce battles against Ukrainian forces and Turner has dubbed this a "Putin put" which he believes provides a floor for gold prices at $1,200. A put option is a contract which offers the right, but not the obligation to sell an asset at a pre-agreed level.

"We've raised our floor price on the grounds of these geopolitical events such as Ukraine and Iraq, we think it's put a 'put' under the market."

Foreign Buying

Also on the plus side for the precious metal, Turner believes than when the price falls slightly it spurs buyers in China and India who are inclined to buy physical gold items rather than gold derivatives or paper-based assets traded on exchanges.

However, this tailwind seems to have dissipated this year. In its latest quarterly report The World Gold Council noted that total global gold demand in the second quarter had fallen 16 percent from the same period last year, with demand in top buyers China and India falling about 50 percent and 40 percent respectively.

Central Banks

If physical demand is wavering then the reins may have been picked up by central banks who remain net buyers of the commodity in 2014. Data from the International Monetary Fund's financial statistics report continue to show that the Russian central bank has been stocking up on gold in an effort to diversify its reserves.

"Would you want to put your funds into U.S. dollars?" SP Angel's Meyer told CNBC.

"There's been lots of central bank buying. So that's positive. [Russia is] definitely buying gold, they bought 55 tons so far in the first half [of 2014] and I'm sure they'll be buying more of it, the Chinese too," he added.

6 Financial Issues to Tackle in the Fall
See Gallery
Fed Hike or 'Putin Put'? Factors Affecting Gold
For many employers, open enrollment season for some benefits happens in October. This usually sneaks up on some people, who scramble to decipher benefits and make elections last minute. Although you won't be able to see the options until the enrollment period opens, take time now to review your benefits. Are you taking advantage of any 401(k) matches? Are your fully funding your Flexible Spending Account? What about employer offered life and disability insurance? (A fun infographic from the Council for Disability Awareness shows your risks). Maximize your benefits and don't leave any money on the table.
Back-to-school time can be expensive if you're not prepared. Money is spent on clothes, books, supplies and technology -- and that's before the doors to the classroom have even opened. Before hitting the stores, do these two things:
  • Conduct an online search for "coupon code" along with the name of any store you'll be shopping at. Typically you can find some great online deals.
  • Get a list from you class or teacher of specific type of notebook, calculator, etc. required. If you can't get child's "must haves" from ahead of time, buy just the bare minimums until school starts and the list is available.
It's hard to think about the holidays when we're just making it through summer, but now is the time to build up a financial cushion. Set yourself up with an automatic transfer to a separate savings account and participate in the Holiday Fund Money Challenge to build up a savings of $450. How much do you need for the gifts, travel, parties, entertaining, food and other holiday activities you anticipate? Planning will help to ease the stress that comes around the holidays.
In lieu of scrambling at the end of the year to make contributions to retirement accounts by Dec. 31, double-check your contributions now and determine if there's room in your cash flow to allow for an increase to possibly max out by year end.
Summer is a typically a time of transitions. There are weddings, moves to new homes, possibly a new family addition and more. If summer is the time when these events take place, fall should be the time to take stock of how they're panning out. If you're recently married and haven't already, now is the time to have the money talk with your spouse and make decisions about spending plans, merging (or not merging) accounts, beneficiary updates and more. If you've moved, check out how the new location has affected your cost of living spending in terms of activities, gas costs, groceries and more. Ultimately with any transition, you need to review your spending plan and determine what areas (if any) need to be adjusted.
If you're lucky enough to live in one of the states that actually experiences seasons, fall is the time to prep for energy savings by caulking and weatherstripping doors and windows, turning your thermostat back for a fixed period each day and insulating your attic, basement or outside walls.
Read Full Story
  • DJI26833.9545.850.17%
  • NIKKEI 22522757.57132.190.58%
    Hang Seng26678.27111.540.42%
  • USD (PER EUR)1.110.00050.04%
    USD (PER CHF)1.01-0.0003-0.03%
    JPY (PER USD)108.61-0.0580-0.05%
    GBP (PER USD)1.290.00020.01%