Gold, other safe havens outperform as VIX surges

The U.S. Comex gold futures (COMEX:GCV13) advanced for three consecutive weeks and have rebounded 20.4% since the trough on June 27. This week, the gold futures were up 1.75% to finish at $1,420 on Tuesday. Year-to-date, the prices declined 15.26%. The Dollar Index (NYBOT:DXZ13) ended at 81.166 on Tuesday and fell 0.24% this week. The S&P 500 Index (CME:SPV13) fell almost 2% while the Euro Stoxx 50 Index declined 2.72% in the past two days. The developed equity markets are still up 13% this year while the emerging equity markets fell about 11%. The "fear index", VIX, jumped almost 20% to 16.77 percent this week as the tensions in Syria deepened while the crude oil futures (NYMEX:CLV13) are approaching $110 per barrel.

Encouraging Economic Data

The U.S. August consumer confidence index jumped to 81.5 compared to the 79 expected as rising house prices and stock markets help to raise income expectations and consumer sentiments. The June U.S. S&P/Case-Shiller home price index rose as expected by 12.1% year-over-year. The August German business confidence level also beat expectations, rising to a 16-month high of 107.5. Growth recovery and rising confidence should help Chancellor Merkel to get her third term on Sept. 22. The ECB is also likely to maintain the interest rate at the current level or lower for an extended time period.

Safe Havens Outperform for Now

As the U.S. and its allies warned that they could strike Syria within days, the prices of the safe havens including gold and the U.S. Treasuries have jumped. At the same time, the emerging market central banks continue to add gold to their reserves and have a lot more room to do so. Russia added 6.3 tons to its gold reserves, which now exceeds 1,000 tons and constitutes 7.4% of total reserves compared to the 70% holding in the U.S. In India, the plunge in the rupee by close to 10% in August has pushed up gold prices, which went from 24,830 Rupees per ten gram on June 28 to a high of 33,824 on Aug. 27. The surge in gold prices, however, will likely hamper the upcoming festival gold jewelry demand.

What to Watch

We will monitor the St. Louis Fed and the Richmond Fed speeches on Aug. 29, Germany's August unemployment change, the U.S. four-week moving average initial jobless claims and the Japan July CPI and industrial production data on Aug, 29 as well as the E17 July unemployment rate and the U.S. July PCE price index on Aug. 30.

About the Author
Austin Kiddle

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

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