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More Breathing Room for Gold as the Fed Emphasized Policy Continuity

The U.S. Comex gold futures touched a high of $1,294.4 on Tuesday but ended at $1,289.80, up 1.18% for the day and 7.28% for the year. On Wednesday morning in Asia, the gold futures gave back about five dollars. The S&P 500 Index rallied in four consecutive days and is up 1.27% this week but is down 1.35% including dividends this year. The Euro Stoxx 50 index has risen 1.27% this week but has fallen 0.75% including dividends this year. The U.S. 10-year government bond yield rallied from 3.0282% at the end of last year to a low of 2.5761% on 3 February and is currently at 2.725%. The Dollar Index is essentially flat this week and has rallied 0.75% year-to-date.

Fed Policy Continuity Boosted All Markets
While the U.S. January unemployment rate dropped to 6.6%, the non-farm payrolls only increased 113,000 compared to an expected 180,000. The soft employment report sparked a gold price rally last Friday. The gold price got a further boost after the Fed Chairman Yellen’s speech on Tuesday, which emphasized policy continuity and a high bar for both changing the pace of the QE tapering and for raising the interest rates. China reported a surprisingly high exports growth of 10.6% year-on-year in January versus an expected 0.1%. Its imports also jumped ten percent year-on-year compared to an expectation of four percent. Though distortions and over-invoicing could be the reasons for the high numbers, a pick-up in exports growth to most regions and strong import data show that the underlying trend of the economy is not as weak as the earlier PMI data have indicated. 

China Demand Surges and ETF Flows Stabilize
The China Gold Association said that Chinese gold demand jumped 41% to 1,176.4 metric tons and China’s gold production reached 428 tons in 2013. With falling stock markets and the government’s clampdown on the real estate sector, investors in China pile into gold especially when prices dip. After dropping 33% in 2013, the gold-backed ETP holdings dropped another 24 tons this year although in February the holdings have been steady. The net long combined gold positions by managed money fell two percent in the week ending 4 February after rising for five consecutive weeks. The gold price rally of about seven percent this year shows that not only much bad news has been priced in but also gold remains an important portfolio diversifier.

This story is provided by Sharps Pixley, for more information and content please visit: www.SharpsPixley.com

12 Feb 2014 | Categories: Gold

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