Gold Prices Rally on Economic, Geopolitical Worries

New York (Aug 6)  Gold prices rose to their highest level in nearly two weeks on Wednesday, as worries grew over economic weakness in the euro zone and tensions between Russia and the West.

Gold for December delivery, the most actively traded contract, rallied $22.90, or 1.8%, to $1,308.20 a troy ounce, the highest settlement price since July 21. The contract posted the biggest one-day percentage gain since June 19.

Italy fell back into recession for the third time since 2008, data showed Wednesday, signaling that the euro zone's recovery has hit a major stumbling block. The country's gross domestic product declined 0.2% in the second quarter of 2014, missing expectations. The news weighed on European stocks and buoyed gold, an asset that some investors seek out in times of political and economic instability, believing it will hold its value better than other assets.

The rise in gold continued a rally sparked Tuesday afternoon, when Polish Foreign Minister Radoslaw Sikorski said Russian troops are poised to pressure or invade Ukraine, causing gold prices to reverse losses and head higher in aftermarket electronic trading. Conflicts in Ukraine and the Middle East have helped buoy gold prices in recent months, even as the market has been weighed down by expectations that the Federal Reserve may tighten monetary policy sooner than expected.

On Wednesday, Russian President Vladimir Putin signed a decree imposing limits or bans on a range of agricultural and food products, as well as raw materials, from countries that have imposed sanctions on Russia, further inflaming an international row over Moscow's alleged involvement in Ukraine's civil war. The U.S. and European Union slapped Russia with their toughest round of sanctions yet last month, after pro-Russian rebels in eastern Ukraine allegedly downed a Malaysian airliner, killing nearly 300 people. Western leaders allege the plane crash was a direct result of Moscow's support for the rebels.

"The weakness in the equity markets, the conflict in Ukraine, all of it is putting people on edge," said Peter Hug, director of precious metals at Kitco.

In other markets, silver rallied 1% to $20.024 a troy ounce in the most actively traded September futures contract. Gold and silver often move in the same direction, as some investors view silver as gold's cheaper cousin and purchase it as both a currency alternative and a store of value.

Platinum closed the day up 0.6% at $1,465.20 a troy ounce, while palladium reversed losses to close up 0.1% at $848.90. Russia is the world's biggest exporter of palladium and its second-largest platinum exporter after South Africa.

"Any indication of Russian sanctions affecting palladium supply is bound to result in a sharp rebound," analysts at UBS said in a note to clients. "Should the situation deteriorate significantly, with the risks deemed sizable enough, we would expect palladium to very easily overcome resistance and make new highs."

Palladium hit a 13-year high of $890 a troy ounce on July 14, supported by expectations of increased demand from the automotive industry. The metal is used to filter emissions from gasoline engines.

Source: WSJ