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Some Voices of Caution on Gold

The U.S. Comex gold futures have rallied 6.13% in June and close to ten percent in H1 to end at $1,322.60. The gold futures reached a three-and-a-half month high at $1,334.90 on 30 June. Similarly, the CRB Commodities Index has jumped ten percent in H1. The Dollar Index has declined 0.32% in the first half to 79.775 while the S&P 500 Index has jumped 7.13% (total return) and the Euro Stoxx 50 Index has increased 6.73% in the same period. While stocks and commodities have done well in the past six months, the U.S. ten-year government yield has also rallied about 50bp.

Global Manufacturing Scoreboard
China kicked off the good news on manufacturing by showing a higher manufacturing PMI index at 51 in June compared to 50.8 in May. The U.S. June ISM Manufacturing Index was steady at 55.3 compared to 55.4 in May. New orders have climbed to a six-month high. The June flash PMI index in the U.S. was 57.3 compared to 57.5 in May. While the June U.K. manufacturing index rose the fastest in seven months, the Euro Zone June flash PMI fell 0.4 point to 51.8. The Euro Zone inflation was at 0.5% in June, suggesting that the ECB will need to keep the interest rates low for a considerable period of time to combat the uneven recovery and the possibility of deflation.

Caution on the Gold Rally
The speculators net total combined gold positions have more than doubled from 51,280 contracts as of 10 June to 114,356 contracts as of 24 June. This was led by a huge short-covering in the past month, sending the short contracts from 70,364 as of 3 June to 31,470 as of 24 June. The stellar performance of the gold market reflects partly the safe-haven bids for gold due to the geopolitical risks in Ukraine-Russia and the Middle East, the prolonged low interest rates environment, a weak dollar as well as the renewed gold-backed ETF buying. As the gold prices reach an overbought position, some analysts warn that weaker prices are coming as the economic recovery quickens, the dollar rebounds, and interest rates rise in the year ahead. Physical buying from China has slowed with the Chinese gold prices trading currently at a one dollar discount to the global prices.

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02 Jul 2014 | Categories: Gold

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