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Will the Fed Calm or Ignite More Fear for the Gold Investors?

The U.S. Comex gold futures dropped 1.49 percent in the past two days while the S&P 500 index jumped 1.54 percent and the Euro Stoxx 50 Index rose 1.26 percent. At 2.185 percent, the U.S. 10-year government bond yield is trading only 5 basis points below its recent high of 2.23 percent. Year-to-date, the gold futures have corrected 18.43 percent to $1,367 while the CRB Commodities Index dropped 2.91 percent and the Dollar Index rose 1.06 percent.

Data before the Fed Meeting
The U.S. CPI rose 0.1 percent in May compared to the expected 0.2 percent. Year-on-year, the CPI rose 1.4 percent compared to 1.1 percent in April. The core inflation rate rose 0.2 percent as expected. An inflation rate of lower than two percent gives the Fed more room to continue with the monetary stimulus. The May U.S. housing starts also rose less than forecasted at a yearly rate of 914,000.

Investors Positioning
After jumping 17.48 percent in the previous week, the net non-commercial combined positions in gold declined 7.13 percent during the week of 11 June to 60,227 contracts. In the past twelve months, the level has declined 56 percent as the developed market equities have risen 22 percent. According to Barclays, the net redemptions from gold-backed ETFs have slowed, with an outflow of 15 tonnes in the first half of June compared to 48 tonnes in the first half of May. The cash-negative gold positions have also fallen to fewer than 70 tonnes. On the contrary, investors in China continue to see gold as a store of value, boding well for the launch of the first two yuan-denominated gold ETFs to be listed on the Shanghai Stock Exchange.

Reading the Fed
According to a Bloomberg survey on 7 June, the Fed will likely trim the QE by $20 billion to $65 billion as soon as the October meeting. For the Fed’s meeting, the investors will watch out for the conditions under which the bond purchases will be reduced, the Fed’s outlook for the interest rates as well as the Fed’s projections of the inflation and the unemployment rate.

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19 Jun 2013 | Categories: Gold

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