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Gold Prices Influenced by the Rising US-Euro Rates Spread

The U.S. Comex gold futures climbed 0.27% week-to-Thursday but were trading lower at $1,084 during Asia Friday morning, a level last seen in February 2010. The gold futures dropped 7.12% while the crude oil futures plunged 18.41% this month. In contrast, the S&P 500 Index rose 2.33% and the Euro Stoxx 50 Index jumped 4.74% month-to-date. The Dollar Index rose 0.33% this week and 2.71% for the month. The U.S. ten-year Treasury bond yield was unchanged this week and ended at 2.259% on Thursday while the German ten-year Bund yield fell 4bp this week to 0.648%.

Pace of the U.S. Liftoff
The June 17-18 FOMC minutes were unclear about the timing of the first rate hike, but it is clear that the Fed’s rate liftoff is going to be gradual. According to Bloomberg, there is a 44% chance that the Fed Funds will rise at the September meeting and a 73% chance before the year-end. A continuous improvement in the labour market is a prerequisite for a rate hike although inflation continues to be soft and the inventories continue to grow, not a sign of a strong economy. In fact, the Q1 U.S. GDP grew at a revised annualized 0.6% while the Q2 grew at an annualized rate of 2.3%, compared to an expectation of 2.5%.

Dollar Rise and Casualties in Commodities
The rise in expectation of a September hike has widened the interest rate gap between the U.S. and the Euro in the swaps market, pushing the dollar stronger. The rise in the dollar this month particularly hurt the commodities, which were already impacted by the supply gluts and the concern of the drop in Chinese demand and global trade. Gold prices have priced in a rate hike this year; if the Fed delays the rate hike, the gold prices could see a big swing on the upside especially when the short gold positions among speculators are at an all-time high.

What to Watch
We will monitor the July China NBS manufacturing PMI on 1 August, the U.S. June Core PCE price index and the U.S. July final Markit PMI on 3 August, the Bank of England monetary policy decision on 6 August as well as the July U.S. non-farm payrolls, the average hourly earnings, and the unemployment rate on 7 August

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31 Jul 2015 | Categories: Gold

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