|By Jay Elliott-Purdy||
|May 26, 2014 11:52 AM EDT||
Gold was on a roll two weeks ago and surpassed the $1,300 per ounce level due to escalation of political tensions between Ukraine and Russia, before recording losses as markets are anticipating that the Fed will trim even further its asset purchasing program later this month.
On April 24th gold’s price dived to $1,268 per ounce, more than a 10-week low, and then rallied as the tension in Ukraine intensified. During the three sessions from April 24th to April 27th, the price of gold increased by $20 to end the trading week with a 1.6% surge after demand by the markets for safe haven assets.
Pro-Russian militia seized control of a number of government buildings and other strategic positions at the eastern part of Ukraine, before Ukrainian forces clashed with them and regained control. The incidents resulted in five casualties and the Kremlin hinted at military action on their behalf. The struggle continued during the weekend with the abduction of several members of the Organisation for the Security and Cooperation in Europe (OSCE) by pro-Russian rebels. Although one of them was later released because of health problems, the rebels voiced their intention to keep the rest of the hostages. The United States and European Union imposed financial and political sanctions, such as visa rejections and asset freezes, to a number of Russian individuals and companies soon after the annexation of Crimea from Ukraine by Russia.
On Monday April 28th the Kremlin raised concerns over an increase of U.S. and NATO military forces close to Russian borders after no signs of de-escalation of the crisis. Russian Defence Minister Sergei Shoigu had a telephone chat with his U.S. counterpart Chuck Hagel where no compromise reached between the two parties. In efforts to apply pressure to Russia for discontinuing their military activity in Ukraine, the U.S. and Europe imposed new sanctions to new Russian policymakers.
Although the Ukraine crisis was a main reason for traders’ reduction of risk appetite and investment in safe haven assets, weak housing economic U.S. data did little to help the dollar to strengthen and added to gold’s price rally. According to a report released lately, new home sales decreased in March by 14.5% in relation to the previous month and the inventory for unsold new homes increased to 3.2% for the same month.
It’s a different story for gold since the beginning of May as the precious metal erased part of its gains. There is increasing speculation that the Federal Reserve will further trim its asset purchasing program during the two-day meeting of its members. The price decreased as much as 1.4% and at some point dived back to $1,286 per ounce. Even though there are some short-term volatility injections to the gold’s price such as economic indicators, the effect that the Ukraine-Russia crisis is having on prices is more likely to prevail. Further escalation of the crisis and any further military action by any of the parties involved might increase demand again for the shiny metal, whereas a deflation of the problem could drive investors back to more risky assets.