More Will Join China and Australia in Rate Cutting, Better Gold Price Ahead?
Gold futures had a big turnabout in the past 48 hours. From last Friday
to this Wednesday, gold futures surged 4.6%. On Thursday, prices
slumped 2.8% to $1,588, the biggest one-day drop since early April.
This week, gold futures have dropped 2.1%, compared to last week’s rise
of 3.4%. In the past two days, the S&P climbed 2.3% while the Stoxx
went up 2.7%. The EUR/USD rebounded 1% this week while the Dollar
Index fell 1%.
Gold prices have jumped in anticipation of more easing from the U.S.,
Europe and China. Real GDP growth in the U.S. has dropped from a recent
peak of 3% in Q4 2011 to 1.9% in Q1 2012. In Q1 2011, the Euro Area
grew by 2.4%; it contracted by 0.1% in Q1 2012. Chinese GDP growth went
from 9.7% in Q1 2011 to 8.1% in Q1 this year, and the expected Q2
growth may drop to 7.9% or lower.
On 5 June, Australia cut its interest rates by 25bp, the first cut in 3
years. On 7 June, the PBOC (the Central Bank of China) announced they
would cut the 1-year lending rate and the deposit rate by 25bp. This
move signals the beginning of China’s rate cut cycle to help investment
and consumption. China last cut its interest rates in December 2008.
The ECB, though kept interest rates unchanged, revealed that several
Council members voted for an interest rate deduction. In today’s
testimony to the Congress, Ben Bernanke did not announce any new
actions, though he said the Fed still has easing options, citing that
Europe is the biggest threat to the U.S. economy and financial system.
In the short-term, gold price will continue to be pushed around by
traders’ speculations on easing. The fundamental issues remain that
global growth has entered a soft patch, sovereign funding costs in many
European countries have continued to rise, the U.S. fiscal policy has
been tightened, and China’s excess capacity has jumped. The world may
well come to a loosely-coordinated monetary easing. With such low real
interest rate and bond yield, gold stands out as a cheaper alternative
The most important events to anticipate this month will be the 17 June
Greek re-election, 18-19 June G20 meeting and the 19-20 June FOMC
Sharps Pixley, London