Gold Overreacts to QE3 Ending Soon
The U.S. Comex gold futures traded in a wide range from $1,661.20 to
$1,695.40 in the first two trading days of the year. After jumping
almost 2 percent in the first half of the week, the gold futures dropped
0.84 percent on Wednesday, and fell almost 1.50 percent during the
first three hours of Asian trading on Thursday. The S&P 500 Index
rose 4.06 percent this week while the Euro Stoxx 50 Index rose 2.83
percent. The Dollar Index exceeded 80 again, rebounding 0.81 percent in
the past two days.
Decent Global Economic Tone
Economic data from the major countries have been showing some
improvement. The China December non-manufacturing PMI index rose at the
fastest pace in four months. The number of people out of work in
Germany rose by 3000, lower than the 10,000 expected in December. In
the U.S., ADP employment grew 215,000 in December, higher than the
140,000 forecasted.
Fear of QE3 Ending Sooner Than Expected
However, gold, stocks and bond prices plunged on Thursday after the
release of the December FOMC minutes, which revealed that QE3 could end
this year. The tone seems to be a bit different from that in the 11-12
December FOMC meeting when Ben Bernanke announced the linkage between
the interest rate level and the numeric targets of unemployment rate and
inflation. Given the current unemployment rate is still well above the
6.5 percent threshold, it is unlikely for the Fed to end the QE3
anytime soon. Other governments are still stimulating their economies.
Japan will likely increase its inflation rate by increasing asset
purchases while adding to fiscal stimulus. China plans to increase
infrastructure spending and sustain loan growth.
Rising Structural Demand for Gold
Other structural changes can support gold prices. In the Basel III,
gold has been re-rated from a Tier-3 asset to a Tier-1 asset, or
“zero-risk” collateral. This means that banks can decide to buy gold
instead of sovereign bonds to fulfill the rise in the Tier 1 asset
requirement. The Shanghai Gold Exchange has just started a trial on
gold inter-bank trading in order to increase the liquidity and flow of
gold in China.
Events to Watch Next Week
Important events will include the China industrial production growth in
December on 9 January, and the ECB interest rate announcement and the
Bank of England monetary policy decision on 10 January.
Robert Jilles
Sharps Pixley, London
www.sharpspixley.com
04 Jan 2013 | Categories: Gold
