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Geopolitical Changes Keeping Investors’ Interest in Gold

At $1,294.60 on Tuesday, the U.S. Comex gold futures were almost unchanged this week after rallying 0.45% last week. The gold futures have climbed 7.68% year-to-date and have dropped 0.10% this month. The S&P 500 Index has returned -0.41%, the Euro Stoxx 50 Index has risen 0.33% while the CRB Commodities Index has declined 0.84% month-to-date. The Dollar Index has been hovering right around the 80 level for the past week. Among traditional assets, the ten-year U.S. Treasury bond has outperformed this month, rallying 14 basis points to 2.5106%. The government bond yield touched a recent low of 2.4716% on 15 May.

The Fed, Inflation, and Geopolitics
As the investors await the April Fed minutes on Wednesday and digest the various Fed governors’ speeches, the market is sensing that the interest rates will be kept at its present rate for a long period of time. Fed Chairman Yellen has been focusing on a broader measure of unemployment, which includes the labour participation rate and the types of people who are unemployed, instead of just the unemployment rate. The FOMC will also study closely the responses of financial conditions and markets before altering policies. The April U.S. payrolls jumped 288,000 while the unemployment rate dropped to 6.3%. However, the housing sales have slowed, industrial production has declined 0.6% in April while the May preliminary confidence index has fallen to 81.8, pointing towards a slow-growth-low-interest rate environment. Core inflation was 1.8% as of April. In the U.K., the Bank of England may start taking steps in June to cool the housing market, which has risen 12.2% year-on-year in February. Elsewhere, Ukraine’s election on 25 May, the latest election victory by India’s BJP Party, and Thai’s martial law are drawing investors’ interests to the gold market.

Gold Fundamentals and Investors Positioning
According to the World Gold Council (WGC), the gold demand in Q1 2014 was 1,074 tonnes, three tonnes lower than in Q1 2013. Consumer demand, especially jewellery demand, has continued to drive gold demand. Central banks have net purchased 122 tonnes of gold, the 13th consecutive quarterly rise while ETP outflows have dropped to 0.2 tonnes for the quarter. While the WGC described that the fundamentals and long-term demand trend have remained robust, the world largest gold-backed ETP, the SPDR Gold Trust, has just seen its lowest holdings since December 2008. The managed gold net combined position has dropped 8.32% as of 13 May, led by an increase in the net short positions by 10.5%. New catalyst in gold demand will include rising Indian demand in the second half of 2014 as the new Prime Minister Narendra Modi is pro-business and is likely to ease import curbs on gold. Demand in India may rise from 974.8 tons in 2013 to 1,000 in 2014 according to WGC.

21 May 2014 | Categories: Gold

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