Gold Supported by Libya Tensions and Inflation

By Michael Montgomery—Exclusive to Gold Investing News

After price corrections in the gold market following the Japanese disaster, the price of gold has been making gains. Following the low last week of $1400.50 per ounce, prices made substantial gains back up to $1432.00 on continuing violence in Libya, and a weaker dollar. Trading on Tuesday was weaker, with prices falling in early trading and making a modest recovery by close. The gold price remained generally flat, up $1.70 to close at $1428.80 per ounce. Prices are  being largely supported by weak economic data from the US holding down the dollar. Crude oil prices once again are climbing up on fears of larger implications of ongoing tensions in the Middle East and North Africa (MENA), the potential for inflation caused by high oil prices may also be a supportive factor in the price.

The dollar has been reaching new lows, albeit with less momentum than last week. Poor US home sales data has the market worried not only about a struggling economic recovery, but also about interest rate and quantitative easing decisions from the Fed. The ongoing weak economic data ensures that QE2 will continue, and may spark a new round of measures from the Fed. However, the political climate in Washington may weigh on another round of bond purchases, or other large measures. Richard Fisher, President of the Dallas branch of the Federal Reserve, has said that he opposes any extension of QE past June stating that inflationary pressures are building worldwide.

Oil prices ticked higher still with the UN Sanctions and bombing of Libya. Brent Spot price went over the $115 mark. Uprisings in Bahrain are being quelled with the support of Saudi troops. Protests in Yemen have continued as well, raising fears that unrest will continue to be a factor in the Middle East, driving speculation and raising oil prices. These factors will only increase the level of inflationary trends in Europe and the US.

In England, inflation grew higher than expected in February as the CPI climbed by 4.4 percent year-on-year. This is higher than the Bank of England’s hopes of holding inflation to 2 percent, raising the possibility of increasing interest rates. Much is the same with the European Central Bank, as “yesterday’s assertion by ECB officials that they remain on course for an April interest rate hike, despite the question marks related to the global economy that the Japanese quake of March 11th has engendered,” stated Jon Nadler, for Kitco.

The higher costs of commodities in relation to the oil price is beginning to show its teeth with higher than expected inflation data, which bodes well for gold going forward. Downward movements in price may pose buying opportunities as inflationary data related to high oil prices have yet to be realized, and will trickle in with next month’s inflation numbers.

A note of caution comes from Mickey Fulp, the self-proclaimed ‘mercenary geologist.’ In an interview with The Gold Report, he cautions that gold prices may be in a corrective period.

“Gold is overdue for a correction and, in fact, was in the midst of one with a 7% drop before Middle East turmoil in late January caused safe-haven and speculative buying. In my opinion, recent geopolitical issues have distorted the precious metals markets, caused safe-haven buying and prevented a full-blown correction from occurring,” stated Mickey Fulp. He added that corrections are defined as a 10-30 percent drop, but the 10-year gold charts show constant year-over-year increases, and the trend should continue. The trend for increasing gold prices should be supported by increasing CPI/inflation numbers surrounding sustained high oil prices.