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Gold Market Likes the ECB Plan and Anticipates More from the Fed

After rising 4.64 percent in August, the U.S. Comex gold futures rose a further 1.06 percent in September to close at $1,703.2 on 6 September. Month-to-date, the S&P 500 returned 1.81 percent, the Euro 50 Index surged 3.45 percent and the Euro/Dollar Index rose 0.41 percent. The Dollar Index fell 0.11 percent in September after falling 1.73 percent in August.

The world has high hopes of further global stimulus as recent economic data from the U.S., Euro area and China all show a weakening trend. The high unemployment rate in the U.S. and uncertainty in the Euro crisis have impacted spending and investment plans elsewhere. The U.S. August ISM index dropped 0.2 point to 49.6 with new orders and employment index also dropping. The Euro area PMI was revised down in August while the Chinese August HSBC PMI fell to a three-year low, raising doubt of the government’s 2012 growth target of 7.5 percent.

External markets rallied big on 6 September when the ECB Governor Draghi unveiled the details of his much-anticipated bond purchasing program although the measures were leaked the day before. The ECB will buy unlimited amount of short-dated bonds with maturities up to three years while “sterilizing” the bond purchase to keep the money supply neutral. The ten-year bond rates of Italy, Spain and Portugal rallied 25 to 39 bp upon the announcement. The ECB action will buy some time for the big borrowers in Europe such as Italy and Spain to prevent their borrowing costs from blowing through the roof. While in the short-term borrowing costs may be lowered, the underlying competitiveness issues of the Euro zone are still not addressed.

Traders have positioned themselves for a good month in gold in September. According to Bloomberg, gold open futures contracts jumped to a three-month high as of 31 August while the gold-backed ETPs holdings surged to an all-time high of 2,471.97 metric tons as of 6 September. Festival demand in India and expectations of ECB measures also caused the gold bar price in India to touch an all-time high of Rupee 32,300 per 10 grams on 6 September.

In the coming days, market will likely focus on the U.S. non-farm payroll data on 7 September, Chinese industrial production data on 9 September, the German constitutional court ruling on ESM on 12 September, the U.S. FOMC monetary policy announcements on 13 September and the Eurogroup’s decision on Spanish debt purchase on 15 September.

Austin Kiddle
Sharps Pixley, London

14 Sep 2012 | Categories: Gold, Euro

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