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Safe Havens including Gold Outperformed as the VIX Surged

The U.S. Comex gold futures advanced for three consecutive weeks and have rebounded 20.4 percent since the trough on 27 June. This week, the gold futures were up 1.75 percent to finish at $1,420 on Tuesday. Year-to-date, the prices declined 15.26 percent. The Dollar Index ended at 81.166 on Tuesday and fell 0.24 percent this week. The S&P 500 Index fell almost two percent while the Euro Stoxx 50 Index declined 2.72 percent in the past two days. The developed equity markets are still up 13 percent this year while the emerging equity markets fell about 11 percent. The “fear index”, VIX, jumped almost 20 percent to 16.77 percent this week as the tensions in Syria deepened while the crude oil futures are approaching $110 per barrel.

Encouraging Economic Data
The U.S. August consumer confidence index jumped to 81.5 compared to the 79 expected as rising house prices and stock markets help to raise income expectations and consumer sentiments. The June U.S. S&P/Case-Shiller home price index rose as expected by 12.1 percent year-over-year. The August German business confidence level also beat expectations, rising to a 16-month high of 107.5. Growth recovery and rising confidence should help Chancellor Merkel to get her third term on 22 September. The ECB is also likely to maintain the interest rate at the current level or lower for an extended time period.

Safe Havens Outperform for Now
As the U.S. and its allies warned that they could strike Syria within days, the prices of the safe havens including gold and the U.S. Treasuries have jumped. At the same time, the emerging market central banks continue to add gold to their reserves and have a lot more room to do so. Russia added 6.3 tons to its gold reserves, which now exceeds 1,000 tons and constitutes 7.4 percent of the total reserves compared to the 70 percent holding in the U.S. In India, the plunge of the Rupee by close to ten percent in August has pushed up gold prices, which went from 24,830 Rupees per ten gram on 28 June to a high of 33,824 on 27 August. The surge in gold prices, however, will likely hamper the upcoming festival gold jewellery demand.

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28 Aug 2013 | Categories: Gold

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