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Gold: A Counterbalance to Market Volatility

The U.S. Comex gold futures fell 0.57% in the past two days to $1,316.90 on Thursday after rising in the previous nine days. Year-to-date, the gold futures have rallied 9.53% while the S&P 500 Index fell 0.46% and the Euro Stoxx 50 Index rose 0.40%. The Dollar Index has risen 0.19% this week to 80.286 on Thursday while the gold futures have fallen 0.13% this week. Similar to gold, the CRB Commodities Index have risen 7.52% this year.

Dollar Buying
In the January FOMC minutes, the Fed showed its commitment to continue to taper, prompting traders to buy dollars. The preliminary February U.S. PMI unexpectedly jumped to 56.7 compared to the expected 53.6. The more positive outlook in the U.S. contrasts with a worse than expected February flash manufacturing PMI in China, which declined to a seven-month low of 48.3. In Europe, the February factory gauge retreated one point to 53 compared to an expected 54. Since inflation in Europe remains stuck at less than half of the target of two percent while the unemployment rate remains high at 12%, the ECB may ease its monetary policy further. Whether or not the global central banks will coordinate better their monetary policies and their implications on developing countries will be hotly debated in the G20 meeting this weekend.

What it Means for Gold Prices
With the uneven growth in the world economy, a China decidedly clamping down on credit growth, political crises in Turkey and Ukraine as well as upcoming elections in India, South Africa, Indonesia, Thailand, etc., volatility in the market will ensue. As currencies weaken, inflation shoots up, and political crises recur in the emerging countries, gold has resurfaced as a safe haven and a hedge against other securities. The rebound in the gold prices this year has been accompanied by a highly volatile VIX index.

What to Watch
The two-day G20 meeting will start this Saturday in Australia. We will also monitor the February Germany IFO business climate index and the U.S. January new home sales on 26 February, the ECB President’s speech on financial stability, the February unemployment change in Germany, the January CPI and the industrial production for Japan on 27 February as well as the E18 January unemployment rate and the Q4 U.S. GDP second release on 28 February.

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21 Feb 2014 | Categories: Gold

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