Can gold keep rallying if Fed disappoints?

The U.S. Comex gold futures retreated 0.76%, the Dollar Index rebounded 0.4%, and the S&P 500 index was flat while the Euro Stoxx 50 Index dropped 1.57% in the past two days.

The U.S. economic news has fared a bit better although news from Europe and Asia has been disconcerting. U.S. July consumer purchases gained 0.4% after falling in the past two months. The U.S. economy grew at an annual rate of 1.7% in Q2. Consumer spending also rose 1.7% and savings rate reached 4% from 3.6% in Q1. The August confidence report in the Euro area shows that manufacturers, services and consumer sentiments have continued to weaken. Economic contraction in Europe contributed to a substantial decline in exports from China to the EU, down 16.2% year-on-year in July. Japan's prices continued to fall while South Korea's industrial production fell for a second month, reflecting weak external demand.

From the recent trough on May 16 at $1,536.60, gold futures rebounded 7.7% as central banks increasingly discussed more economic stimulus measures. The July FOMC minutes released on Aug. 22 gave gold price a push. Several members favored more monetary easing, especially given unemployment rate is still stuck at above 8% while recovery has been slow. As pointed out by Bill Gross of PIMCO, the largest bond investor in the world, the Fed has a dual mandate of keeping price stable and maximizing employment, hence quantitative easing should be in the cards.

Gold traders from Asia to Europe have turned cautious before the speech on Friday by Bernanke. The Fed may refrain from giving the timing of a QE3 at his speech, although traders expect him to sustain the market's expectations of further easing. Given that the central banks tend to buy gold on dips, and investors now own 78.99 million ounces of gold via ETPs, the third largest gold reserve in the world, gold price will see some support even though Bernanke may disappoint in his speech.

Next week, the market will likely focus on the China's August PMI Index on 1 September, the ECB meeting, the U.K. interest rate decision and the Merkel and Rajoy discussions on the Spanish aid on 6 September.

About the Author
Austin Kiddle

Austin Kiddle is a director of the London-based gold broker Sharps Pixley Ltd.

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