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Rising Fundamental Support of Gold Prices

The U.S. Comex gold futures dropped 0.77% on Thursday to $1,320.60 and are flat this week. In the past three days, the Dollar Index has surged 0.54% to 80.212, up 0.21% for the week. The S&P 500 Index jumped 1.28% while the Euro Stoxx 50 Index surged 1.96% this week. The Dow Jones Index surged past 17,000 the first time on Thursday while the U.S. ten-year government bond yield jumped 10bp this week to 2.638%.

Changing U.S. Rates Expectations
The U.S. June non-farm payrolls reached 288,000, way above the expected 215,000. The June unemployment rate declined to 6.1% from 6.3% while the average hourly earnings growth increased two percent year-on-year, also higher than expected. Currently, the Fed officials predict that the benchmark interest rate will be 1.13% at the end of 2015 and 2.5% in 2016 while the Fed Funds futures are pricing in 0.78% and 1.82% for the two dates according to Bloomberg. Some Wall Street analysts are moving up their forecasts for the first interest rate hike by one quarter in 2015, and gold prices have reacted negatively to the possible changes in the Fed’s action. In Europe, the ECB kept the benchmark rates unchanged and gave guidance on the targeted loans (TLTRO) but failed to announce any asset purchases. 

Fundamental Support for Gold
While the sentiment on gold in the West ebbs and flows, the World Gold Council is bullish on Asia’s gold demand, which will gain strength in the second half of the year. With the Chinese central bank engaging in targeted easing, the economy has stabilized and will grow at close to 7.5% this year, underpinning their gold demand. In India, the June gold imports have surged 74% from a year ago as imports curbs are being relaxed. The market is expecting the government of the world’s second largest consumer to announce a cut in the gold import duty by two percent in the budget on 10 July.

What to Watch
We will monitor the Minneapolis Fed governor’s (FOMC voter) speech on 8 July, the release of the FOMC June meeting minutes, and China’s June inflation on 9 July, the Bank of England interest rate and asset purchase decisions, China’s June trade data and M2 growth, and the Indian 2014 budget announcement on 10 July.

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04 Jul 2014 | Categories: Gold

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