Gold market needs new catalysts as traditional assets outperform

The U.S. Comex gold futures (COMEX:GCZ13) fell 1.17% on Monday to $1,272.30 and rebounded about $1 on Tuesday. The Dollar Index (NYBOT:DXZ13) also fell 0.18% in the past two days to 80.704. After rising last week, the S&P 500 Index fell 0.55% and the Euro Stoxx 50 Index dropped 0.18% this week. The CRB Commodities Index also fell 0.68% in the past two days. The prices of the U.S. 10-year government bond dropped as the yield climbed 15bp this month to 2.707 percent on Tuesday. While most asset prices fell this week, the VIX index jumped 1.20 percentage points to 13.39%.

Nothing New from the Fed

Ben Bernanke indicated on Tuesday that the near-zero Fed Funds rate will likely remain at that level long after ending the QE purchases and "pushing" the unemployment rate well below the 6.5% threshold. It is not clear to Bernanke that if the Fed withdraws its support, the labor market improvement will not be sustainable. Both Janet Yellen, the Fed governor nominee, and Charles Evans, a FOMC voter, are in no hurry to reduce stimulus. Subdue inflation and low credit demand suggest a moderate recovery so far. Bloomberg pointed out that a better 2014 for the global economy will require an agreement in February on the debt limits between the two parties in the U.S. and President Obama to end sequestration.

Investors Prefer Traditional Assets

According to the CFTC, the combined net gold positions by managed money declined about 37% during the week ending Nov. 12, led by a 104% jump in the short contracts. While the gold futures fell 24% this year, the MSCI developed world equity markets index rose close to 24%. The worldwide gold-backed ETP holdings tracked by Bloomberg have continued to fall, declining 0.5 million troy ounces in November and 24.6 million troy ounces year-to-date. So far, various sources support that most of the gold liquidated from the ETFs have been re-melted into gold bars and sent to China.

In Wednesday's FOMC minutes release, Barclays urged that the investors should focus on the discussions about the financial markets conditions in the U.S. and the Fed's readiness (or not) to lower the unemployment rate threshold.

About the Author
Austin Kiddle

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

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