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Growth, Stocks and Gold

After rising annually for 12 consecutive years, the U.S. Comex gold futures sank 28 percent in 2013 to end at $1,202.30, back to the level in mid-2010. The total gold-backed ETF holdings dropped by a third last year, with the largest Gold ETF, the SPDR Gold Trust, dropping by a whopping 41%. While the ETF holdings have continued to drop this year, the U.S. Comex gold futures have rebounded 2.27 percent to $1,229.60 on 7 January. The S&P 500 Index retreated 0.55% and the Euro Stoxx 50 Index was flat year-to-date after the indices returned 32% and 23% last year. The Dollar Index rose only 0.33% last year, masking the huge decline of the Yen by about 18% and the surge of the Euro by four percent against the Dollar. The U.S. ten-year government bond yield surged 127bp to end at three percent at the end of 2013, a two-and-a-half year high. The predictions of gold price this year remain diverge.

Different Paths of Growth and QE
After Janet Yellen has been confirmed as the new Fed chairman, the market focuses on the different economic trajectories of the various major economies. The U.S. is strengthening while the U.K. is trying to cool off its hot housing market. The Fed will continue to dial back its QE purchases. The resulting dollar strength and a higher Treasury yield can push up other government bond yields. The ECB stands ready to lower interest rates as the Euro recovery is at best frail. The Bank of Japan continues its pace of government bond purchases to counter the effect of a three percent rise in the sales tax and to raise the inflation rate. The general easing tone of the Central Banks and the continued low interest rates will entice investors to invest in stocks. However, a stronger dollar poses a headwind for gold. The U.S. and the Eurozone manufacturing PMI stayed strong in December while the U.S. Services PMI dropped from 53.9 in November to 53 in December. The Chinese December PMI dropped to 50.5 from 50.8 in November while the Services PMI dropped from 52.5 to 50.9.

Analysts Expect Weaker Gold Prices
The CFTC reported that the managed gold net combined positions jumped 19% for the week ending 31 December, with the shorts falling five percent. Despite the better hedge funds sentiments, the sell-side analysts gravitate towards weaker gold prices due to the absence of inflation, the higher growth in the U.S., the reduced tail risks, and the stronger dollar. As Barclays pointed out, for the gold price to turn significantly higher, signs of greater physical demand from China, India, and the official sector as well as delayed interest rate hikes are needed. If the weak recovery in the European economies and the stocks take a turn for the worse, then market’s attention could turn back to gold.

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08 Jan 2014 | Categories: Gold

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