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Bearish Gold Sentiment Sets in with Better U.S. Labour Market and Gold ETP Outflow

The U.S. Comex gold futures fell 5.91% during September and 8.43% in Q3. The monthly loss was the worst since June 2013. Year-to-date, the gold futures have risen just about 0.70%. On the contrary, the Dollar Index jumped 3.85% in September and 7.72% in Q3, the largest quarterly rise since Q3 in 2008. The S&P 500 Index has dropped almost two percent since reaching an intra-day peak of 2,019 on 19 September. The Euro Stoxx 50 Index was almost flat for the quarter and rose 1.68% in September. The U.S. ten-year Treasury yield ended at 2.49% last month while the German ten-year Bund yield finished at 0.945%. Most advanced economies’ bond yields rose in September.

Strong Dollar Reflects Divergent Central Banks Policies
The Dollar has risen due to geopolitical tensions in Eastern Europe and the Middle East as well as the expected rise in the U.S. interest rates and a likely QE in the Eurozone next year. The dollar strength however can pose some risks to the U.S. economic growth, making the Fed a bit more cautious in raising interest rates. The September U.S. Consumer Confidence Index fell to 86 from 92.4 in August while the PCE deflator rose only 1.5% year-on-year in August compared to 1.7% in May. Germany’s unemployment rose 12,000 versus an expected decline of 2,000 in September while the economy contracted in Q2.

Investors’ Positioning
The recent strength in the labour market in the U.S. and the outflow of gold-backed ETPs provide a negative backdrop for gold prices. According to the CFTC, the managed money combined net gold positions dropped for six consecutive weeks to 44,265 contracts, a 69% decline from early July. The short gold contracts have approached the recent peak level as of December 2013. According to Barclays, the gold-backed ETP holdings have turned decidedly negative, falling 27.5 tonnes in the month to 25 September and 77.4 tonnes for the year. However, with the bearish macro backdrop, declining sentiment, and falling prices, the gold market has priced in most of the bearish news. The market will clearly focus on the ECB announcement this Thursday for the implementation of its asset purchases program and a hint of QE next year.

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01 Oct 2014 | Categories: Gold

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