Will the Fed calm or ignite more fear for gold investors?

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

Data before the Fed Meeting

The U.S. CPI rose 0.1% in May compared to the expected 0.2%. Year-on-year, the CPI rose 1.4% compared to 1.1% in April. The core inflation rate rose 0.2% as expected. An inflation rate of lower than 2% 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% in the previous week, the net non-commercial combined positions in gold declined 7.13% during the week of June 11 to 60,227 contracts. In the past 12 months, the level has declined 56% as the developed market equities have risen 22%. 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 June 7, 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.

About the Author
Austin Kiddle

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

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