Gold Price Volatility Jumped while Yellen Remains a Dove
The U.S. Comex gold futures dropped 2.3% on Monday, the largest daily
percentage decline since mid-December last year. The futures fell a
further 0.7% on Tuesday to $1,297.10 before stabilizing during Asia’s
Wednesday morning. The Dollar Index rose 0.25% this week to 80.39. The
S&P 500 Index rose 0.29% while the Euro Stoxx 50 Index was flat and
the CRB Commodities Index fell 0.35% in the past two days. The
ten-year U.S. government bond yield rose 3bp to 2.547% this week.
Yellen Speeches in the Spotlight
The Fed Governor Janet Yellen testified on the monetary policy to the
Senate Banking Committee on Tuesday and will testify to the House
Financial Services Committee on Wednesday. So far, the governor has
reiterated the need for accommodative monetary policy because in her
mind, the labour market has not improved sufficiently given the record
high number of long-term unemployed, the low labour participation rate,
and weak wage growth. However, the gold traders have negatively reacted
to her statement that if the labour market would improve quicker than
forecasted by the Fed, then a rise in the Fed Funds rate would be sooner
than anticipated. Currently, the Fed governors expected the interest
rate to rise to 1.13% at the end of next year; this is a faster pace of
rate increase than currently priced into the market. The governor also
warned that the valuation in some market segments, including the
biotechnology and social media stocks and leveraged and junk debt, is
stretched.
Chinese Growth and Gold Demand
China managed to beat market expectation and grew at 7.5% year-on-year
in Q2 given the increased infrastructure spending, tax cutting, and
targeted reserve ratio cuts. The June industrial production rose 9.2%
year-over-year compared to 9.0% expected. The retail sales rose 12.4%
and the fixed asset investment grew 17.3%, both in line with
expectations. The evidence of economic recovery should support gold
demand. According to the analyst Koos Jansen, Chinese wholesale private
gold demand reached 973 metric tonnes this year as of 4 July as
measured by the withdrawal from the Shanghai Gold Exchange vaults (all
gold supply has to be sold through the Exchange in China), and the
long-term uptrend for physical demand remains intact. On another note,
the World Gold Council recently mentioned that with historically low
credit spreads and low market volatility across many assets, gold can be
added to the portfolio as a diversifier to reduce long-term portfolio
volatility.
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16 Jul 2014 | Categories: Gold