Geopolitical Risks Bigger Impact on Gold Despite FOMC Meeting Next Week
The U.S. Comex gold futures have rallied 2.56% week-to-Thursday to
$1,372.40 ahead of the Crimea referendum this Sunday. The S&P 500
Index, the Euro Stoxx 50 index, and the MSCI World Index have declined
1.64%, 2.45% and 1.69% respectively in the same period. The CRB
Commodities Index has also sold off 1.48% this week led by oil and
copper. The U.S. 10-year U.S. Treasury yield has rallied 14bp this week
to 2.653% ahead of the FOMC votes next week while the Dollar Index has
declined slightly by 0.10%.
China Outlook Disappoints while the U.S. Data Improve
While the Ukrainian vote this Sunday has clearly spurred the safe haven
demand for gold, investors have also chased after gold as an overall
portfolio hedge as China’s outlook remains muddled and the first
official Chinese onshore corporate bond default has recently occurred.
The latest data on Chinese industrial production, retail sales, and
fixed investment have disappointed investors. In January-February,
China’s industrial production grew 8.6% yoy versus 9.5% expected, the
retail sales increased 11.8% compared to 13.5% expected, and the fixed
assets investment grew 17.9% versus 19.4% expected. The losing momentum
of Chinese growth has led to the ex-gold commodities sell-off but has
raised hopes that the Chinese Premier will allow policy easing to reach
his “flexible” growth target of 7.5% in 2014. In the U.S., the
February retail sales beat estimates and rose 0.3% while the latest
weekly initial claims dropped from 323,000 to 315,000.
Seasonally Weak Physical Demand
Analysts also point out that the gold rally has taken place in the face
of subdued physical demand. The Shanghai Gold Exchange premium over the
spot price remains small while the positive gold lease rate means that
the gold supply is sufficient. India demand is still low as tariffs and
import duties are still in place to curb the country’s current account
deficit. With the rally driven more by short-covering than renewed
bullish positions, traders warn that the gold prices rally could reverse
as geopolitical tensions go away while physical demand is seasonally
weak.
What to Watch
We will monitor the Crimea referendum on 16 March, U.S. February
industrial production on 17 March, the February U.S. core CPI and
housing starts on 18 March, the U.S. FOMC meeting decision and press
conference on 19 March as well as the U.S. existing home sales on 20
March.
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14 Mar 2014 | Categories: Gold
