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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

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