Gold price volatility continues as investors prepare for the Fed's QE tapering

The U.S. Comex gold future prices rebounded 0.33% this week to $1,397.20 on Tuesday and reached almost $1,408 during Wednesday Asian morning. The S&P 500 index is flat this week after falling 1.14% last week. The Euro Stoxx 50 index has fallen 0.50% this week after rising 0.19% last week. The Dollar Index continues to be under pressure, falling 0.73% this week after a drop of 0.39% last week. The U.S. 10-year government bond yield rose about 2bp week-to-date to 2.147% on Tuesday, down 8bp from the one-year high reached on May 29.

Fed Tapering Debate Continues

Gold prices jumped on Monday in reaction to the unexpected contraction in the U.S. May ISM manufacturing data to 49 from last month's 50.7, giving the market hopes that the Fed will continue its stimulus. However, recently both the Fed President George and the Fed President Fisher called for a dialing-back of the stimulus as the housing market improves and the low interest rates encourage more risk-taking. According to Bloomberg, the U.S. payrolls rose on average 196,000 per month in the first four months of this year while the unemployment rate dropped to 7.5% in April. A rise of above 200,000 on a sustained basis may prompt the Fed to reduce the pace of stimulus. The bullishness toward gold has dropped as the Fed has mentioned the possibility of trimming the bond purchases in the next few meetings depending on the economic outlook. Investors will keenly watch this Friday's nonfarm payroll numbers.

Gold Wagers and Investors Demand

Barclay reported that the net redemptions of gold-backed ETPs reached 454 tonnes this year, 183 tonnes in April and 114 tonnes in May. Barclays estimated that the cash-negative ETP holdings have fallen to 92 tonnes, and the redemptions will slow should gold prices go back above $1,500 an ounce or the equity markets correct. As of May 28, the speculative gross shorts futures positions in gold soared to a record high of 115,686 contracts while the net position as a percentage of open interest touched a record low since June 2005. Physical demand has slowed in Asia as well especially in India as the country has widened the curb on gold imports from banks to nominated agencies and trading houses while seasonal demand has also turned down.

About the Author
Austin Kiddle

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

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