Gold Soars to Four-Week High on Geopolitical Tensions

February Comex Gold rallied to a four-week high on Wednesday, taking out the December 4 top at $1088.30. The gain of over 1% took place despite a stronger U.S. Dollar. The catalysts behind the rally was weaker global equity markets fueled by tensions in the Middle East between Iran and Saudi Arabia and a reported test of an H-bomb by North Korea.

Risk aversion prompted safe haven flows into gold, allowing the market to stabilize and rally. There were earlier reports of physical demand, but they slowed as the market approached the psychological $1100.00 level.

Gold has been underpinned all week, mostly due to fears about the Chinese economy and the devaluation of the Yuan. Some traders fear turmoil will return to the global markets if China devalues its currency again before the end of the week.

Selling pressure in South Korea and Japan led to steep declines in their equity markets, leading investors to take hedge protection in gold. These traders were reacting to reports that North Korea had successfully tested a miniaturized hydrogen nuclear device.

In other news, relations between Saudi Arabia and Iran remain tense. The row between the nations began over the week-end after the Saudi’s executed a Shite cleric. This set off a storm of protests in Tehran including the storming of the Saudi Arabian embassy.

February crude oil prices plunged to their lowest level in eleven years on Wednesday. Although the tension between Iran and Saudi Arabia has not directly affected any pipeline activity, which would have been bullish, it has decreased the chances the two nations would cooperate in cutting output. Some traders claim the conflict between Iran and the Saudi’s has stripped about 8 percent off the price of a barrel of oil.

Also driving the price of oil lower is the fear that an economic slowdown in China will mean less demand for oil, leading to a further build up in inventory. Additional pressure is coming from reports of an economic slowdown in India.

Today’s U.S. Energy Information Administration’s inventory report for the week-ending January 1 was bearish. Although crude inventories dropped by 5.1 million barrels, the report showed the U.S. added 10.1 million barrels of gasoline. Traders reacted to the news by selling crude oil.

Although stock indices continued to weaken on Wednesday, the EUR/USD also continued its sell-off as traders focused on the divergence between the monetary policies of the European Central Bank and the U.S. Federal Reserve instead of the refunding trade.

The GBP/USD also saw weakness due to falling crude oil prices, the stronger U.S. Dollar and concerns over the timing of the referendum that will decide whether the U.K. leaves the European Union.

In other news, U.K. Services PMI came in at 55.5, slightly below the 55.6 estimate. The news had a minimal effect on the price action.

The U.S. ADP Non-Farm Employment Change report showed the private sector of the economy added 257K jobs in December. This came in well above the 193K estimate.

The U.S. trade balance fell to -42.4B in December. This was slightly below the -44.6B reading in November. The estimate was for -44.0B.

U.S. ISM Non-Manufacturing PMI was 55.3. Still above the 50 contraction level, but lower that the 56.0 estimate and 55.9 reading last month. Factory orders came in as expected at -0.2%.

Later today, traders will get an opportunity to react to the latest FOMC Meeting Minutes. This should cause increased volatility at the end of the day.