IBT: Gold price higher as sovereign-debt contagion spreads
The gold price continued running higher yesterday on the back of more bad economic news from Europe. Concerns that Spain and Italy will be dragged into the sovereign debt crisis sent Spanish and Italian government bond yields higher, while stock markets around the world sold off. At one point yesterday America’s Dow Jones Industrial Average was down by as much as 180 points, before regaining some ground to settle at 12381.26 for a 1.05% intraday drop.
Not surprisingly given these developments, the euro also received a beating on foreign exchange markets, losing ground against other major currencies. In particular, the US dollar is continuing to benefit from the present European situation, though the Dollar Index (USDX) has moved down in early trading today. The US government and the Federal Reserve will be pleased to see the US bond market benefiting from “safe haven” capital flows, with the yield on the benchmark 10-year US government note declining by 0.556% in trading yesterday to 3.132%. The yield on the 3-month Treasury Bill is currently just 0.05%, and earlier this month reached as low as 0.01%.
This is partly a result of investors selling euro-denominated assets and buying dollar assets, but is also to do with the tussle over the US debt ceiling, with the US Treasury Department issuing fewer T-Bills in order to try to keep the government under the official debt ceiling.
America’s monetary authorities will also be cheered by the decline in crude oil prices caused by the dollar’s gains on currency markets. West Texas Intermediate (WTI) crude oil for July delivery settled yesterday at $97.70 – down $2.40. A report from HSBC that showed manufacturing growth in China in April reached it lowest level in nine months was a contributory factor to this price decline. The bank’s Purchasing Managers Index (PMI) shows that new order manufacturing growth in China is currently below the long-run trend.
This downturn in the crude oil market is likely a short-term phenomenon, however. Goldman Sachs is predicting the price of Brent crude to reach $130 a barrel within 12 months.
The Comex gold contract for May delivery settled yesterday at $1,515.30 per ounce, up by $6.50 or 0.4%. Other precious metals were however hurt by the continuing investor flight from “risk” assets, with silver for May delivery down 0.5% to $34.901, platinum down 0.8% to $1,755.90, and palladium down 0.5% to $731.80.
