Gold slipped below $1,200 an ounce today due to a number of factors, and there are fears that this is only the beginning. The latest bearish signs for gold include a strengthening dollar, an energy rally, and an increasing fear that Russia will stop stockpiling gold and start selling in an effort to boost its economy.
Recently, Russia unexpectedly raised interest-rates from its central bank as it desperately tries to save the ruble after economic sanctions have crippled its currency. Analysts feel that the Russian government’s next move may be to start selling off all of the gold it has been buying up in the last few months. A sudden influx of available gold could send the metal’s prices plummeting.
“Russia is at a critical juncture and given the sanctions placed upon them and the rapid decline in oil prices, they may be forced to dip into their gold reserves,” Kevin Mahn, who oversees $150 million at Parsippany, New Jersey-based Hennion & Walsh Asset Management, told Bloomberg. “If it happens it will push gold lower.”
According to reports, Russia’s cash pile has dropped to a five-year low as its central bank spent more than $80 billion in an attempt to jump start the economy. The ruble has strong ties to the price of oil, so when oil prices dropped in recent weeks the ruble was severely wounded. Bloomberg believes that this current drop in gold prices is a signal that traders are betting that the country will start to tap into its reserves.
“Russia has been adding to their gold through the turmoil and it’s their reserve asset so they would utilize it ultimately,” Michael Widmer, metals strategist at Bank of America Corp. in London, told Bloomberg. “Russia could use the gold to raise cash or use it as collateral.”
James Cordier, founder of Optionsellers.com in Tampa, Florida, agrees with this assessment, “Gold may come under further pressure because of Russia. Oil prices are not on their side, so now the next option they have for raising cash is selling gold. There is some talk that the country has either started selling or is making arrangements to sell their gold.”
In Other Bearish News
Gold prices are dealing with an extreme yo-yo effect at the moment. The yellow metal has always been sensitive to changes in the market and recently those changes have come in droves. Depending on the day, the news can either be good or bad for gold investors. Today’s news falls into the bad camp, as stocks rallied after oil prices have leveled out after steep declines.
In addition, the dollar strengthened while the world waits for the Federal Reserve to end their two-day meeting. According to Bloomberg1, “economists are predicting that Russia’s currency crisis and plunging oil prices won’t stop policy makers from dropping a vow to keep interest rates low for a ‘considerable time.’ Consumer prices in the U.S. fell by the most in six years on lower fuel costs, while inflation was at a five-year low in the euro area. More than $2.7 trillion was erased from the value of equities worldwide in less than a month as oil sank to a five-year low.”
These negative indicators may lead to some drastic short-term action to stimulate the economy, pushing precious metal prices lower, but overall they could be a bullish sign for gold. These market rallies and the Russian sell-off may be doing a favor for gold investors. Driving the price lower and creating a better buying opportunity in the near future in anticipation of equity buyers reversing strategy and moving to safe-havens like gold.
Additional Sources
1 – http://www.bloomberg.com/news/2014-12-16/u-s-stocks-sink-amid-ruble-tumble-while-yen-holds-gains.html