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Gold Underperformed in Q1; What to Expect in Q2?

The U.S. Comex gold futures dropped 4.83 percent in Q1 2013, the first back-to-back quarterly losses since March 2000.  In the past two days, the gold futures retreated 1.18 percent to end at $1,575.90 on Tuesday and were further down 0.5 percent during early Asian trading hours on Wednesday.  On the contrary, the Dollar Index rose 4.02 percent in Q1 and is trading above 83 on early Wednesday morning in Asia.  The S&P 500 index returned a staggering 10.03 percent and outperformed the MSCI All-Country index which returned 5.98 percent last quarter.  The Euro Stoxx 50 index declined 0.45 percent in Q1 as the European debt concerns resurfaced.  The U.S. 10-year government bond yield rose 9bp during last quarter and remained around 1.85 percent this week. 
Gold ETFs Holdings Decline Spooked Investors
Bloomberg reported that the gold-backed ETP holdings dropped 6.9 percent in Q1 to 2,450 metric tons, the largest quarterly outflow since 2004.   Societe Generale recently called the gold market a "bubble" while gold price will enter a bear market as a stronger U.S. recovery will likely cut short the Fed stimulus effort and further strengthen the U.S. dollar.  The investment bank estimated that should the gold price drop below $1,400, gold producers may start to hedge their production, causing further fall in gold prices. Goldman Sachs has also recently said that the gold price has peaked.  Physical demand has weakened as exemplified by a 23% drop of the U.S. Mint sales of gold coins in March.  Hedge funds have also reduced their positions in gold by 70% from the level in October according to the CFTC data as of 26 March. They have increasingly traded gold from the short side.

What to Expect for Gold Investors
While the Cyprus banking situation has been "contained" with the government imposing strict control on deposits withdrawal, Barclays noted that investors will price in a similar deployment in the weakest banks in Europe, affecting their bond and equity prices.  Gold traders continue to watch if the ETP holdings will level off or continue to fall. The last week of March saw a modest rise in ETP holdings.  Elsewhere in China, gold volume reached a record high in March as prices dropped below $1,600.  The market will focus on the ECB interest rate and monetary policy decision and the BOJ target rate on 4 April as well as the U.S. March non-farm payroll data and the unemployment rate on 5 April for any changes in policy decisions.

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03 Apr 2013 | Categories: Gold

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