Gold, equities and the real economy show signs of disconnectedness

The U.S. Comex gold futures fell 0.84% this week after falling 1.88% last week. In contrast, the Dollar Index climbed 0.54% after climbing 1.24% the week before. The S&P 500 Index surged 1.02% while the Euro Stoxx 50 index rose 0.37% after rising for three consecutive weeks.

Disconnect between the Real Economy and Asset Prices

Both stocks and bonds have reached elevated levels due to the stimulus by the global central banks, but not because of strong economic growth. Bubble talks about bonds and stocks have surfaced as have the concerns that the Fed will taper off its QE program sooner than expected. The world's largest bond house, PIMCO, recently warned of a sharp drop in the risky markets if economic growth turns out to be much worse. While the U.S. April retail sales unexpectedly rose 0.1% compared to a forecast of a 0.3% decline, the Chinese April fixed asset investment and industrial production both trailed estimates. After the ECB has cut interest rates, the central banks of Australia and Korea also unexpectedly lower interest rates as commodity prices and exports have weakened.

Gold Prices in a Tug of War

As Barclays pointed out, the strength in the physical demand has countered the gold-backed ETF outflows, which amounted to 39 tonnes during the first week of May and about 380 tonnes year-to-date. However, Barclays believes that there is a bigger risk of the physical demand slowing down instead of the ETF flows bouncing back in the near term. With equities racing ahead and the U.S. dollar strengthening, gold prices will likely face renewed downward pressure. A U.S. dollar rally may be in store because of the relative U.S. economic outperformance, a higher bond risk premium and a fairly cheap currency. A stronger dollar will weaken commodity prices including gold. Nevertheless, the physical buyers and central banks will again be the supporter of gold prices at lower prices. The combined short speculative gold positions at the CFTC remained at a record high since 1999. This means that gold prices can be boosted by a short-covering rally at some point.

About the Author

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