Gold prices are slightly higher in early trade this morning as stocks are weaker and the dollar trades a touch higher. Markets are currently digesting the latest GDP data, which was revised lower but not quite as much as analysts had expected. Thus far, the GDP data does not appear to be much of a factor in market action.
Markets are also looking forward to the latest data on Chicago PMI and consumer sentiment later this morning. This data will be closely watched as investors look for further signs of strength. While the first quarter was a let-down from an economic perspective, many seem to believe that things have picked up substantially since then. That being said, odds appear to be pointing towards a rate hike by the Fed this year — perhaps in September or possibly even July. The notion of this hike has kept a lid on gold prices, and recent data and commentary indicating a hike is more likely has kept gold on its heels.
While the potential for a rate hike may keep gold under wraps, ongoing discussions on Greece and its debt issues may help keep a floor under gold prices. The current four month bailout extension is set to run out at the end of June, and while some reports indicate some progress has been made, others state that Greece and its creditors remain a world apart.
The country could run out of cash any day now, and without a deal in place the result could be disastrous. According to reports, bank deposits in the country are at 10 year lows. The country is running out of cash, and a default could potentially trigger chaos within the nation. This could lead to capital controls, frozen deposits or worse. The euro could tumble if such an event unfolds, and global financial markets may be severely shaken. Gold and precious metals could possibly stand to benefit handsomely in such a scenario as risk aversion takes center stage and investors look for perceived safety.
The dollar index is the other big factor affecting gold currently. As the U.S. gets ready to hike interest rates, other nations such as the EU and China are continuing with stimulative measures. China recently lowered interest rates again, while the ECB stands by ready to add to its already massive QE program. This certainly creates a disconnect among central banks, but also underscores the idea that any hikes by the Fed will be small and incremental.
Should the dollar challenge its recent highs, gold may remain under pressure in the absence of new developments in Greece.
