Gold Looks Cheaper While Stocks Crack under Fed Rates Expectations and Valuations
The U.S. Comex gold futures rebounded 0.21% to $1,221.20 on Thursday
after falling roughly the same on Wednesday. The gold futures have
risen 0.47% this week and 1.57% for the year while the S&P 500 Index
and the Euro Stoxx 50 Index have surged 7.96% and 6.22% respectively
this year. However, the S&P 500 Index fell 1.41% this week while
the Euro Stoxx 50 Index dropped 1.62%. The Dollar Index has climbed to
the highest level of 85.195 on Thursday since mid-2010 as the Dollar
Index has risen mightily from 80 to the current level in about three
months. The U.S. ten-year government bond yield has fallen 7bp this
week to 2.502% on Thursday while the ten-year German Bund yield has
dipped below one percent on Thursday.
U.S. Dollar in Focus
While the Dollar Index has climbed about 6.5% in the past three months, the Euro/Dollar has plunged 9.1% since the beginning of May to 1.2751 on Thursday, reflecting both the divergence of the Fed’s and ECB’s policies and the different growth prospects and inflation outlook of the U.S. and the Eurozone. In fact, the ECB’s favourite inflation expectations measure, the five-year/five-year inflation swap, has dropped to the lowest level since October 2010 to 1.91% last Tuesday according to Bloomberg. This means that the ECB may announce more QE measures in the meeting next week. The Fed governors’ speeches this week urge more patience before raising the U.S. interest rates given the latest year-on-year PCE index has risen 1.60% and an inflation overshoot is also justifiable.
Bearish Short-Term Sentiment in Gold
Most Wall Street analysts continue to trim down their forecasts for gold prices due to the rising expectations of a U.S. rate increase in 2015 and the geopolitical risks being more under control in Ukraine-Russia and the Middle East. A strengthening dollar associated with a strengthening U.S. economy and rising yield will lower the demand for gold as a store of wealth and value. Nevertheless, the IMF has shown that Russia, Kazakhstan, Turkey, and Ukraine have added over 35 tonnes of gold in their reserves in August. As the gold fund manager John Hathaway said in a recent presentation, gold is the only tangible and non-financial asset that has ready liquidity and is completely independent of the financial system, which explains why the central banks continue to hold a portion of their reserves in gold.
What to Watch
We will monitor the August U.S. PCE Price index and personal spending and the August Japan industrial production on 29 September, the September Germany unemployment change, the Eurozone September unemployment rate, and the U.S. September consumer confidence index on 30 September, the September final manufacturing PMI of China, the Eurozone, and the U.S. on 1 October as well as the ECB interest rate announcement and press conference on 2 October.
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