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Watching the Government Bond Yields and the Smart Money in Gold

The U.S. Comex gold futures rebounded 1.60 percent last week, passed $1,400 on Tuesday and ended down 0.56 percent on the day (the market was closed on Monday). During Asian morning on Wednesday, the gold futures traded between $1,380 and $1,390. On Tuesday, the Dollar Index exceeded 84 and continued to climb during Wednesday open in Asia. The U.S. Dollar strength has been helped by the surging U.S. bond yield. The 10-year government bond yield climbed 16bp to 2.1652 percent this week and surged almost 50bp this month. After falling 1.07 percent last week, the S&P 500 index climbed 0.63 percent this week while the Euro Stoxx 50 Index surged 2.59 percent in the past two days.

U.S. Confidence Surged while Japan’s Volatility Climbed
The U.S. economy looks like it is back on track. The May consumer confidence index jumped to a five-year high at 76.2, compared to an expectation of 71.2 and 68.1 in April. The S&P/Case-Shiller index of house prices in twenty cities rose 1.12 percent in March and 10.87 percent over a year ago. Home and stock prices gains will likely boost consumer spending in the next quarter and offset some of the negative effects from the fiscal tightening beginning this year. In Japan, the 10-year government bond yield jumped 30bp this month from 0.6 percent at the end of April. According to Bloomberg, the implied volatility of the 10-year JGB futures reached 7.23 percent, the highest level since November 2008, after a disappointing 20-year bond auction on Tuesday. The BOJ governor has expected that the central bank’s bond purchases would lower the bond yield and support growth. Instead, corporate bond yields and mortgage rates have climbed. The Japanese stock market’s implied volatility also surged to a two-year high last week.

Physical Demand and “Smart Money” Positioning
The quick drop last month in gold prices has prompted physical buying in Asia, the Middle East, U.S. and Europe. This has offset the outflow from the gold-backed ETP products which reached 441 tonnes year-to-date, compared to the net inflows in the past two years of 476 tonnes. However, the physical demand has slowed. As of 28 May, the gold premiums have declined to about $3 to $3.50 an ounce in India compared to $10 to $12 earlier in May while the premiums dropped by a half to $3 in the past week in Hong Kong. The U.S. gold coin sales have normalized to about 52koz month-to-date versus 209.5koz in April. The CFTC reported that the managed money accounts have reduced their combined net-long positions in gold to 35,686 contracts for the week ending 21 May, the lowest level since September 2009. However, the producers, processors and merchants in gold, called the “Smart Money”, pushed the net commercial combined positions to -67,821 contracts, the most bullish level since the gold price bottomed in October 2008. This may signal that the gold prices are bottoming.

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29 May 2013 | Categories: Gold

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