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Gold is trading slightly higher, in a one to two dollar range around $1,302 per troy ounce today, as the Italian political rift– the various parties unable to agree on a government months after an election in March – began attracting buyers. The gold forecast is for prices to go higher if the crisis looks like it will spread to the rest of the Eurozone.

On Monday the Italian president refused to accept a euro-sceptic as economy minister and instead appointed Carlo Cottarelli, a former Monetary Fund official to the position of interim prime minister. But with polls suggesting that the euro-sceptics are just about holding the upper hand in the country the Euro is sliding down to a six-month low and euro-denominated gold prices have risen to above €1,200.

Italy’s domestic political woes are unlikely to be resolved soon; instead a September election seems to be the most likely scenario going forward. In the bond markets the crisis has caused the gap between yields on ten-year Italian and German government bonds to widen to over 250 basis points, the highest spread since October 2013.

Gold forecast: China a big factor in price moves

There seems to be something in the water in Europe; the Spanish government may also face new elections if the current prime minister fails to win the vote of confidence at the end of the week.

Bond markets are responding with a gap between yields on ten-year Spanish and German government bonds widening to just shy of 130 basis points. “This would no doubt further increase the political uncertainty in the Eurozone and ensure good demand for gold as a safe haven,” says Commerzbank.

While political turmoil in Europe is lending support to gold prices, there has been less demand in China over the last month. According to data from the Census and Statistics Department of Hong Kong, net Chinese gold imports from Hong Kong fell 35% month-on-month and 48% year-on-year. The fact that the Chinese central bank has not bought any more gold for months now is likely to have played one part in this, notes Commerzbank in its gold forecast.

Brent crude WTI gap widens on conflicting signals

Brent is marching higher this morning, up 0.65 at $75.77 a barrel, while WTI has fallen 1.41% to $66.92/bbl, bringing the price gap between the two oil types to just shy of $9. The last time it was any higher was in March 2015. The markets are trying to reconcile conflicting news flow – on the one hand Russia and Saudi Arabia, the global largest producers of oil, are talking about increasing production levels because they anticipate that renewed US sanctions against Iran may start affecting the country’s output. On the other, increased output from US producers is creating a local oversupply and resulting in a dip in WTI prices.

The Russian production decision, if it goes ahead, should keep the market just about in balance.
“So far, there has been talk of raising production in line with the [previous OPEC] agreement to cut production. Currently oil output it is approximately 800,000 barrels per day below this level,” says Commerzbank.

The Russian energy minister suggested returning oil production to the October 2016 level, in which case OPEC would produce 33 million barrels per day and even if Venezuela, another OPEC member and also a country facing domestic political strife, lowered its output by an additional 500,000 barrels per day the Russian increase would keep the market balanced.

What is more, given that Russia would then also step up its production by 300,000 barrels per day, the cushion for additional outages from Venezuela and Iran would amount to a sizeable 800,000 barrels per day.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Vanya Dragomanovich

Vanya Dragomanovich

Vanya is an award-winning financial journalist who has worked in both television and newswires. She spent over 10 years at Dow Jones covering commodity markets, including metals, coffee, cocoa and oil. She also reported from the floor of the London Metals Exchange, and appeared on CNBC to discuss international metals markets. Since then she has written for several leading financial publications, including serving as commodities editor for FTSE Global Markets.

Vanya continues to cover international commodities markets globally, specialising in particular on metals and alternative energy. She is also the author of a book on CFD trading.

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