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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

04 Jan 2013 | Categories: Gold

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