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Gold Prices Helped by a Non-Hawkish Fed

The U.S. Comex gold futures dipped to $1,190 on Tuesday before ending the day at $1,197.30. On Wednesday morning in Asia, the gold futures rebounded one percent. Year-to-date the gold futures rose 1.11% while the Dollar Index jumped 4.68%. However, the Dollar Index has fallen 0.33% month-to-date. The S&P 500 Index reached a new high of 2115.48 on Tuesday while the Euro Stoxx 50 Index rose for six consecutive days by 3.31%. The crude oil futures fell below $50 this Monday while the VIX index has fallen from a high of 21% at the end of January to 13.69% on Tuesday. The U.S. ten-year Treasury yield fell 3bp this week to 1.98% while the German ten-year Bund yield rose 1bp this week to 0.373%.

Not a Hawkish Fed
With the Fed signaling to the Senate Banking Committee that there will not be an immediate rate hike, the dollar retreated and the gold price rebounded. The Fed appeared to be more optimistic about the prospect of the economy and the labour market but was concerned of the low inflation and the foreign development. If and when the “patience” language is dropped, that will signal that a liftoff in interest rates can happen at any meeting should the data support it, thus providing flexibility to the timing of the rate hike. Other positive market news includes the rebound in the preliminary China PMI from 49.7 in January to 50.1 in February and the winning by Greece of a four-month programme extension with a proposed package which includes state asset sales and more tax collections.

Central Banks Adding Gold
According to the World Gold Council, the central banks have increased their gold reserves for five consecutive years and have added 477.2 tons in 2014. Purchases are likely to be over 400 tons in 2015. The Euro Area added six tons to their gold reserves in January while Kazakhstan and Ukraine also added. Russia has more than tripled their gold reserves since 2005 and has continued to buy gold before selling the first time since March 2014 in January.

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25 Feb 2015 | Categories: Gold

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