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Cheaper Valuation and Lingering Political Risks Will Support Gold Prices

The U.S. Comex gold futures have increased a respectable 6.75% in Q1 although the prices have climbed as high as 14.59% by mid-March but have slumped 2.89% in March. The gold futures declined for five consecutive days and ended at $1,280 on April 1. The CRB Commodities Index jumped 8.74% in the first quarter compared to 1.81% for the S&P 500 Index and 2.12% for the Euro Stoxx 50 Index (including dividends). The Dollar Index was flat in Q1 while the U.S. 10-year government bond yield rallied 31bp to 2.718% despite the Fed’s tapering.

U.S. Leading the Pack
The U.S. March ISM Index climbed to 53.7 from 53.2 in February, driven by an increase in orders and backlogs. The final March PMI for China dropped to 48 from 48.5 in February, which represents the fifth month of decline. The Eurozone March PMI declined slightly to 53 from 53.2 in February. In the U.S., the March Conference Board’s consumer sentiment index has jumped to a six-year high while the February retail sales increased 0.3% compared to a 0.6% decline in January. China’s manufacturing weakness will likely prompt the government to increase its construction spending sooner rather than later. Some analysts expect China to cut the banks’ reserve requirement to support liquidity especially after the onshore bond defaults and slowing growth momentum.

Risks and Slack Still Here
As the Ukraine geopolitical crisis has stopped escalating, the gold-backed ETP holdings have declined ten metric tons during 24 March to the end of the month. This quarter, the gold-backed ETP holdings have declined 3.3 metric tons while in March, the holdings have jumped 13 metric tons. The dovish comments made by the Fed Chairman on 31 March redirected the market’s focus on the slack in the economy, which will keep the Fed stimulus on for “quite some time.” Also, the NATO has pointed out that there are no real signs that the Russian troops are retreating from the Ukrainian border, which could boost the physical demand for gold as valuation has become cheaper.

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02 Apr 2014 | Categories: Gold

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