New ECB Policies will likely Strengthen the Dollar and Hamper the Gold Prices
The U.S. Comex gold futures jumped 0.72% to $1,253.30 on Thursday after
the ECB cut the interest rates to unprecedented levels. The gold
futures have risen 0.62% this week while the S&P 500 Index has
jumped 0.92% and the Euro Stoxx 50 Index has climbed 0.81%. The
Commodities Index has declined 0.40% for the week while the Dollar Index
was flat. The U.S. ten-year government bond yield has risen 11bp
week-to-date. The ten-year German Bund yield jumped to the week’s high
of 1.43% on Wednesday before rallying to 1.402% on Thursday after the
ECB Delivered More than Expected
The four main central banks of the world are embarking on quite diverse paths. The ECB surprised the market a bit on Thursday by cutting the deposit rate to minus 0.10% and the benchmark rate to 0.15%. In addition, the ECB has initiated a Euro 400 billion lending program to allow banks to borrow at a cheap rate for as much as they want until the end of 2016, and the ECB will stop sterilizing its bond purchases. The market expects the bond QE to come later. The U.S. Fed is tapering its bond purchases while the Bank of England is looking to hike and the Bank of Japan is maintaining its asset purchases. While gold prices have rebounded temporarily, the widening yield gap between the U.S. rates and those of other countries may strengthen the U.S. Dollar, which will put a damper on gold prices.
Dwindling Interest in Gold
The U.S. Comex gold open interest was at a five-year low in early April this year although the level has rebounded 5.5% currently. According to Bloomberg, the gold-backed ETP holdings fell $2.6 trillion in value in May while the global stocks added $1.1 trillion. The 100-day volatility of the gold futures reached 13.407%, the lowest level since the end of 2012. Reduced political upheaval and the global stock market rally have reduced the demand for gold.
What to Watch
We will be monitoring the May U.S. non-farm payrolls and the unemployment rate on 6 June, Japan’s Q1 real GDP on 8 June, China May inflation rate and M2 growth on 10 June, the Eurozone April industrial production and the May U.S. retail sales on 12 June as well as the May China fixed asset investments, retail sales and industrial production on 13 June.
06 Jun 2014 | Categories: Gold