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Pro-Growth Tone in Europe and Optimal Gold Allocation

The U.S. Comex gold futures have risen 0.88 percent this week, ending at $1,590.70 on Thursday. Gold prices have risen for two consecutive weeks after falling in the previous four weeks. Gold prices have been hampered by the dollar strength. The DXY index touched an intra-day high of 83.166 on Thursday, just 0.93 point from the level of 84.1 on 24 July 2012. The Dow Jones Industrial Average surpassed its 2007 peak earlier this month while the S&P 500 Index is now 2 points away from the October 2007 peak. The European stocks have risen to a four-and-a-half-year high.

More Soothing News for Europe
The U.S. equity market has been cheered by the improving economic data, especially on the labour and consumer fronts. The U.S. jobless claims fell unexpectedly by 10,000 to 332,000 as of the week ending 9 March. The Bloomberg Consumer Comfort Index rose to an eleven-month high. Better consumer confidence and rising housing markets have also led to a faster jump in the retail sales, which grew 1.1 percent in February. In Europe at the EU Summit, the German Chancellor Merkel sounded more “pro-growth” and emphasized the fight against youth unemployment. The European leaders will likely give more time to countries such as France, Portugal and Spain to reduce their budget deficits.

Central Banks’ Gold Reserves
According to a recent portfolio optimization study by the World Gold Council (WGC), central banks will benefit by diversifying their reserves into the Australian dollars, gold and the Chinese Renminbi. Gold stands out as the dominant asset for diversification due to its better liquidity. The WGC recommended an optimal allocation of about 8 percent. The world’s central banks collectively have 13% of their reserves in gold, with the emerging countries holding on average less than 5 percent in gold. On 13 March, the People’s Bank of China disclosed that it holds 1,054 metric tons of gold or about 1.8 percent of reserves. While the Chinese Central Bank believes that it should not hold more than 2 percent of reserves in gold, gold continues to be used as an important hedge against inflation or deflation.

Upcoming Data to Watch
Data we are watching next week will include the speech by the ECB Executive Board member Asmussen on the Euro theme on 18 March, the February U.S. housing starts on 19 March, the U.S. FOMC meeting on 20 March, the March “flash” manufacturing PMI for China, EU-17 and the U.S. on 21 March, and the March Germany IFO business climate index on 22 March.

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15 Mar 2013 | Categories: Gold

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