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Positive Contagion from China and Europe Boosting Gold

The U.S. Comex gold futures jumped 1.36 percent on Thursday to reach $1,678/oz, gaining 1.76 percent this week. The Euro/Dollar also jumped 1.59 percent to reach 1.3272, a nine-month high. The CRY Commodities index, the S&P 500 index and the Euro Stoxx 50 index rose 0.65 percent, 1.03 percent and 0.62 percent respectively in the past two days. The Dollar Index fell below 80 on Thursday.

Stronger Chinese Data Set the Tone
Better than expected Chinese exports data cheered the stock, gold and commodities markets. In December, Chinese exports jumped 14.1 percent, compared to a forecast of 5 percent. Chinese imports also rose higher than expected at 6 percent, confirming a trend of economic recovery. Oil and commodities currencies also gained upon the news. Higher Chinese economic growth is expected to lead to higher demand for gold as an alternative investment and an inflation hedge. We believe gold price rises due to the higher expected Chinese demand for gold, and less because of the risk-on environment.

Positive Contagion in Europe
On 10 January, the ECB President Mario Draghi held interest rates unchanged at 0.75 percent. However Draghi maintained that risks are still to the downside while inflation is declining, leaving room for further monetary easing. The ECB was encouraged by the financial indicators’ improvement and the stabilization of the market conditions, citing a positive contagion effect. The 10-year Spanish government bond yield has declined by more than 275bp since last July while the Euro/Dollar has reached a nine-month high. The various European governments’ actions and the ECB policies have managed to hold the Euro bloc together, cheering the Euro/Dollar while hurting the U.S. Dollar.

What to Watch Next Week
The important events to watch include the speeches of the San Francisco Fed President and the Atlanta Fed President (both FOMC voters) on 14 January, the Euro-17 final December HICP and the December U.S. industrial production growth on 16 January, the ECB monthly bulletin and the U.S. December housing starts on 17 January, and the Chinese Q4 GDP year-on-year growth on 18 January.

Kelly Smith
Sharps Pixley, London

11 Jan 2013 | Categories: Gold, Euro

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