Gold prices spiked today (Thursday), hitting a near four-month high in early trading. In the morning session, August Comex gold soared $20.20 to $1,355.50 an ounce, its highest level since March 19. Spot gold jumped $17.10 at $1,344.25.
There are a few factors contributing to why gold prices are up today...
Sending the yellow metal sharply higher Thursday was safe-haven and risk-off demand amid disturbing developments in Europe and uninspiring data out of China.
Worries over the financial health of a chief Portuguese lender sent European markets swooning Thursday (and stirred up memories of the Eurozone sovereign debt crisis that rattled markets in the summers of 2011 and 2012).
"People will shoot first and ask questions later when news like this hits," Lawrence Creatura, a fund manager with Federated Investors, told Bloomberg. "The concern of an event like this is always determining whether it's occurring in isolation or whether it's the first domino. It's a classic flight to safety across the equity, commodities, and bond markets."
The ailing Portuguese lender is Banco Espirito Santo, the nation's second-largest bank. Shares of the troubled entity, under pressure since late May when accounting irregularities in its holding companies surfaced, plummeted 14% Thursday. Declines dramatically accelerated after investors learned the bank's parent company, Espirito Santo International, had delayed coupon payments on some short-term debt securities.
In reaction, Portuguese government bonds sold off. The yield on the Portuguese 10-year note rose to 3.885%, up 0.15 basis points.
In overseas afternoon trading, Portugal's main PSI index tumbled 3% and dragged down other European bourses. Germany's DAX slumped 1.5%, London's FTSE 100 dipped 0.8%, and France's CAC 40 slipped 1.6%.
The rout spilled over into U.S markets. All three major benchmarks dropped 1% or more in morning trading.
Further weighing on investor sentiment Thursday was data showing Italian industrial output fell 1.2% in May from the prior month. That was the largest monthly drop since 2012. The news sparked fresh worries about Italy's limping economy.
Additionally, overnight trade data from China was disappointing. While exports from the Asian nation increased 7.2% year over year in June, the read was handily below expectations for a 10% rise.
The gold fear trade was also stoked Thursday from market participants keeping a keen eye on the Middle East.
Earlier this week, Israel launched missiles on the Gaza strip. The situation grew more acute Thursday as Israel dramatically escalated its aerial assault in Gaza, striking 320 Hamas targets. Hit were underground tunnel networks and rocket-launching sites. Over the past three days, some 750 targets have been hit in the enormous offensive that has left at least 80 Palestinians dead.
The grave situation in the region has been likened to a powder keg; it is feared that it could spark unrest in other parts of the Middle East.
And there's even more driving gold prices higher, as this chart shows...
Fed, ETF Inflows and Hedge Funds Provide Support for Gold
Gold prices were still riding higher Thursday on supportive comments uncovered in Wednesday's release of June's FOMC minutes.
Yellow metal prices hit a one-week high Wednesday after several U.S. Federal Reserve members expressed concerns that investors may be growing too complacent on the economic outlook. Those words sent the dollar dipping and goosed demand for the alternative asset of gold.
The minutes failed to provide solid clues on specifically when the U.S. central bank will start raising interest rates. The overall consensus, however, is that no rate hike will occur until at least the first half of 2015.
Gold traders are embracing that projection. Money managers increased net-long positions for the fourth straight week through July 1.
Net-long gold positions climbed 20% to 136,929 futures and options contracts in the week ending July 1, according to the latest data from U.S. Commodity Futures Trading Commission. That's the highest level since March 18, and up fourfold since the start of the year.
Meanwhile, short bets (wagering on a drop) fell 29% - a fourth consecutive weekly retreat.
Moreover, holdings in exchange-traded funds (ETFs) are climbing at the quickest clip since 2012.
Assets in bullion-backed global ETFs swelled by 12.6 metric tons last week, the most since November 2012. Funds continue to bulk their gold stores after six straight quarterly declines that started before gold entered a bear market in April 2013.
Bulls now have gold's reins. The yellow metal is up some 11% year to date, rebounding from a painful 28% drop in 2013.
"Gold's performance has proven the bears wrong so far this year," John Kinsey, who helps manage about C$1 billion ($935 million) at Caldwell Securities Ltd. in Toronto, told Bloomberg. "We look for further strength through the balance of the year."
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