Disconnectedness; Gold, Equities and the Real Economy
The U.S. Comex gold futures fell 0.84 percent this week after falling
1.88 percent last week. In contrast, the Dollar Index climbed 0.54
percent after climbing 1.24 percent the week before. The S&P 500
Index surged 1.02 percent while the Euro Stoxx 50 index rose 0.37
percent after rising for three consecutive weeks.
Disconnect between the Real Economy and Asset Prices
Both stocks and bonds have reached elevated levels due to the stimulus
by the global central banks but not because of strong economic growth.
Bubble talks about bonds and stocks have surfaced as have the concerns
that the Fed will taper off its QE program sooner than expected. The
world’s largest bond house PIMCO recently warned of a sharp drop in the
risky markets if economic growth turns out to be much worse. While the
U.S. April retail sales unexpectedly rose 0.1 percent compared to a
forecast of a 0.3 percent decline, the Chinese April fixed asset
investment and industrial production both trailed estimates. After the
ECB has cut interest rates, the central banks of Australia and Korea
also unexpectedly lower interest rates as commodity prices and exports
have weakened.
Gold Prices in a Tug of War
As Barclays pointed out, the strength in the physical demand has
countered the gold-backed ETF outflows which amounted to 39 tonnes
during the first week of May and about 380 tonnes year-to-date.
However, Barclays believes that there is a bigger risk of the physical
demand slowing down instead of the ETF flows bouncing back in the near
term. With equities racing ahead and the U.S. dollar strengthening,
gold prices will likely face renewed downward pressure. A U.S. dollar
rally may be in store due to the relative U.S. economic outperformance, a
higher bond risk premium and a fairly cheap currency. A stronger
dollar will weaken commodity prices including gold. Nevertheless, the
physical buyers and central banks will again be the supporter of gold
prices at lower prices. The combined short speculative gold positions
at the CFTC remained at a record high since 1999. This means that gold
prices can be boosted by a short-covering rally at some point.
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15 May 2013 | Categories: Gold