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Risk Aversion Aids Gold; Yields Drop

David Becker
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Risk Aversion Aids Gold; Yields Drop

Geopolitical events are overshadowing a light economic calendar ahead of the weekend. The shooting down of the Malaysian plane over Ukraine and the Israel’s launch of a ground assault in Gaza dominate the focus. After a strong response that saw US 10-year yields fall to 2.44% and the dollar fall to nearly JPY101.00, the markets are consolidating, though equities have stabilized.

Gold prices have whipsawed during the week, snapping back above the 1,300 level and recapturing the 10-day moving average on Thursday only to sell off slightly on Friday. Gold is being used as a safe haven asset where investors flock to the safety of the asset but sell it off when risk aversion fades.

Momentum on gold prices remains negative with the MACD (moving average convergence divergence) index printing in negative territory after generating a sell signal this week. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread. The index moved from positive to negative territory confirming the sell signal.

A UN Security Council session will be held today and investors will be cautious ahead of the weekend where both geopolitical situations remain fluid. In addition, the self-imposed deadline for an agreement on Iran’s nuclear development is over the weekend with no deal in hand. Given the geopolitical developments elsewhere, there is likely pressure to extend the deadline. Indeed, the isolation of Russia over Ukraine may make an Iranian deal even more difficult to achieve. That said, geopolitics often wane in influence after the initial adjustment.

The poor US housing starts data yesterday in the US had already softened US Treasury yields and the geopolitical developments drove yields down further. The 10-year has printed at a 1-month low now at 2.44%.

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