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Rising Stocks and Bonds Outshining Gold

The U.S. Comex gold futures have dropped 2.74% this week to $1,256.30 while the S&P 500 Index has climbed 1.05% and the Euro Stoxx 50 Index has risen 1.39%. In the same period, the Dollar Index has climbed 0.13% to 80.494 while the U.S. ten-year government bond yield has fallen 7bp this week to 2.464%. Interestingly, the Spanish ten-year government bond yield has plunged to a multi-year low of 2.822% on Wednesday and is now trading at an almost four-year low spread of 150bp versus the German ten-year Bund yield.

Worldwide Bond Surge and Stock Rally
As the Financial Times has pointed out, this year’s paradox has been a concomitant rise in the stock prices and bond yield in the U.S. and Europe. One reason to explain the demand for safe haven bonds is the compression of the periphery European bond spread over Bunds, possibly driven by the expected ease by the ECB next week as economic recovery and inflation are both weak. The market has also dismissed on Thursday that the U.S. Q1 GDP (second release) has contracted one percent owing to the bad weather. The S&P 500 Index has reached a new high on the same day. With the momentum of the stock and bond prices both picking up and the Dollar Index rallying, gold has retreated to the background and has declined to a low since early February.

Other Factors to Consider
As the gold prices are trading near the marginal production costs of many mining companies, the lower gold prices are simply not sustainable. Also, HSBC’s analyst has pointed out that China’s demand for jewellery, gold coins and bars will drive gold prices this year. Currently, China is consuming about half of the world’s annual production. Gold production will likely decline from the high reached in 2013.

What We Are Watching
We will monitor China’s May NBS manufacturing PMI on 1 June, the May final manufacturing index for the Eurozone and the U.S. on 2 June, the Eurozone April unemployment rate on 3 June, the Eurozone preliminary Q1 GDP on 4 June, the Bank of England and the ECB monetary policy announcements on 5 June as well as the May non-farm payrolls and the unemployment rate in the U.S. on 6 June.

30 May 2014 | Categories: Gold

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