Gold Getting Support from Rising Physical Demand and Euro QE
The U.S. Comex gold futures rebounded over one percent in the past two days to $1,210.10 on Thursday while the Dollar Index also rose 0.85% and the Euro/Dollar plunged 1.25% in the same period. This week, the Euro Stoxx 50 Index jumped 2.42% while the S&P 500 Index was flat and the crude oil futures were down 4.31%. The U.S. ten-year Treasury yield fell 8bp this week to 2.03% on Thursday while the ten-year German Bund yield fell 4bp to 0.323%.
Focusing on Inflation
The Dollar Index has strengthened on the back of a stronger than expected core inflation data in the U.S of 0.2% in January. The Fed chairman also expects that the inflation will climb towards the Fed’s two percent target as the short-term decline in inflation due to oil price plunge is transitory. According to Bloomberg, the market sees a 60% chance that the Fed will raise rates in October this year. In Japan, the consumer prices excluding food rose 2.2% year-on-year in January. However, the core inflation slowed to 0.2% and the inflation-adjusted wages fell 1.7% in December, raising the fear that Japan will fall into deflation again. In Europe, Germany’s February unemployment number fell more than expected by 20,000 while the Q4 GDP growth accelerated and the sentiment in Europe improved. The launch of the Euro QE will likely support the gold prices near-term.
Rising Physical Demand
The gold prices have been supported by rising physical demand from China. Its net imports from Hong Kong rose 12.8 metric tons in January to 71.6 metric tons while gold futures trading in the Shanghai Gold Exchange, the world’s largest physical gold exchange, rose for the second day after the end of the Chinese New Year holidays. Later this year, a gold link-up is likely between Hong Kong and Shanghai following the successful launch of the stock link-up late last year.
What to Watch
We will monitor India’s 2016 budget this Saturday for any signs of the gold import duty cuts. We will also watch China’s February NBS manufacturing PMI Index on 1 March, the Eurozone January unemployment rate, the U.S. February ISM manufacturing index, and the U.S. January core PCE price index on 2 March, the U.S. February ADP private payrolls on 4 March and the Bank of England and the ECB interest rate and asset purchase decisions on 5 March as well as the U.S. January trade balance, the February non-farm payrolls, and the unemployment rate on 6 March.
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