Gold surged to a new four-month high of 1345.28 in early New York trading on Thursday as global stocks sank on weak European data and renewed concerns about a banking crisis in the periphery. Ongoing geopolitical concerns also remain supportive to the yellow metal.
Espírito Santo Financial Group halted trading in its shares after one of its companies missed a debt payment. The group also owns Portugal’s largest lender, Banco Espirito Santo (LISBON:BES), whose shares were also suspended after plummeting 17%.
Interest-rate spreads widened dramatically on flight to quality, as the Portuguese 10-year yields spiked 21 bps. Rates in other periphery countries jumped as well amid talk of contagion and attempts to determine who might have exposure to Espírito Santo Financial Group.
It was just a couple weeks ago that we pointed out that the decline in periphery yields was a gross misrepresentation of risk, that could be blamed on the ECB. “The event has hit European financials like a torpedo and has revived investors’ darkest nightmares about Europe,” said Saxo Nabk’s Peter Garnry in a Financial Times article.
UBS’s Art Cashin echoed the growing contagion worries on CNBC this morning, saying there could be a “domino effect.” Cashin went on to quote his friend and market analyst Dennis Gartman who is apparently fond of saying, “Rarely is there ever just one cockroach.”
The euro sank back toward the lows for the week, but the corresponding rise in the dollar did little to diminish the shine on gold; arguably the safest of all safe-haven asset. Risk-aversion tends to favor the yellow metal.
Geopolitical instability is supportive to gold as well. The situation in Iraq remains quite tense. Russian-back separatist in Ukraine have fallen back to Donetsk where they seemingly will make their final stand. Some of the rebels have taken to calling Russian President Putin a coward for abandoning them, but I doubt this is actually the case.
An op-ed in The Economist says, “Believing that Vladimir Putin has surrendered Ukraine would be naive.” Allowing a violent and bloody last stand in Donetsk may actually play right into Putin’s hand. “A bloodbath in Donetsk would make reintegrating the region into a coherent nation even harder,” says the author.
Meanwhile, the death toll in Gaza is rising as the Israeli military escalated its response to ongoing missile attacks by Hamas. Experts continue to suggest a ground invasion my the Israeli army would be the next step.
Today’s gains bring gold within striking distance of an important trendline noted in a technical chart update from Ron Griess that I posted last week. Gries contends that a break above the trendline (1362.47 presently) would confirm the large triple-bottom in gold, with rather bullish longer-term implications.