Currencies Sell-Off Gone Too Far: Gold Rally Takes a Pause
The U.S. Comex gold futures tumbled 1.58% on Thursday to $1,242.20 after jumping 0.91% on Wednesday. For the week, the gold futures are down 1.75%. On Friday morning in Asia, the gold prices rebounded slightly to about $1,244. The S&P 500 Index reversed its losses on Wednesday and jumped 1.13% on Thursday while the Euro Stoxx 50 Index climbed 0.53% on Thursday after declining 0.89% on Wednesday. Both indices are up week-to-date. The Dollar Index rose three days out of four this week, climbing 0.78% week-to-date and 1.36% year-to-date to 81.085. The 10-year U.S. Treasury Bond yield fell 2bp this week and 33bp this year to 2.6949% on Thursday.
After the FOMC
While
stocks slumped in the days leading to the Wednesday FOMC, better
earnings reports and consumer spending data in the U.S. have helped to
support the markets on Thursday. The Fed decided to trim $10 billion
from the QE programme despite the fact that the economic data from the
U.S. and Europe continue to be mixed and several emerging markets are
battling crises, especially on the political front. While the U.S. grew
a respectable 3.2% annualized in Q4, the contraction of the China
HSBC/Markit PMI to 49.5 in January indicates that the global economy is
still frail. Nevertheless, as the stock prices stabilized and the
emerging countries vowed to stem the currency panic, the U.S. Dollar
rallied while the gold prices fell.
A Better Alternative Currency
As
governments try to boost growth with a weaker currency, low inflation
may eventually turn into higher inflation when monetary debasement
continues. Paul Singer, Fund Manager from Elliott Management, believes
that this is an ideal scenario for gold. When a local currency
devalues, gold prices in local currencies typically shoot up as local
citizens scramble for an alternative currency to protect their wealth.
This is seen in Argentina, Brazil, and Turkey recently.
What to Watch
We
will monitor the official January China manufacturing PMI on 1
February, the January E18 final manufacturing PMI as well as the January
U.S. ISM on 3 February, the January services PMI in the E18 and the
U.S. on 5 February, the U.K. and the ECB monetary policy decisions on 6
February as well as the January U.S. non-farm payrolls and unemployment
rate on 7 February.
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31 Jan 2014 | Categories: Gold