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Gold Caught in the Divergence in Monetary Paths of the U.S. and Europe

The U.S. Comex gold futures has declined 1.21% this week to $1,143.90 and has fallen 2.38% month-to-date. This week, the S&P 500 Index has risen 2.31% and the Euro Stoxx 50 Index has surged 4.21% while the crude oil futures have declined 3.47%. The ten-year German Bund yield dropped 7bp this week to 0.833% and the ten-year U.S. Treasury bond yield fell 5bp to 2.3503%. The VIX Index has fallen to a low of 12.11% from almost 20% on 9 July. The Dollar Index has jumped 1.71% this week to 97.668 on Thursday. The Dollar Index has its best week in two months.

Dollar and Euro
The dollar has been rising due to some sort of “solution” for Greece, stabilization of the Chinese stock markets, and a Fed that seemingly confirms an interest rate hike this year. Greece has voted for the new austerity measures in exchange for a seven billion bridge loan until the region’s parliamentary approval of a three-year rescue package. The ECB increased the emergency line to the Greek banks by 900 million Euros. The divergence in monetary policy expectations in the U.S. and Europe and a rally in European yields have weakened the Euro against the dollar by 2.6% this week even when Greece is reaching a temporary solution.

Weaker Sentiment for Gold
Gold has traded at the lowest level since November as sentiment took a dive when the Fed mentioned that raising interest rates earlier (this year) rather than later would allow a more gradual rate rise later on. Rising equities and the dollar in the midst of low inflation have hampered the gold prices. Market oversupply in several commodities and the availability of capital for investments will put pressure on commodity prices, according to Goldman, adding to the strength of the U.S. Dollar, which hurts gold prices.

What to Monitor
We will monitor how the German and Austrian parliaments vote on the third Greek bailout package on 17 July. We will also monitor the Greek debt payment to the ECB on 20 July, the U.K. July MPC minutes on 22 July as well as the July flash manufacturing PMI for China, Eurozone, and the U.S. on 24 July.

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17 Jul 2015 | Categories: Gold, Dollar

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