Factors affecting gold beyond December FOMC meeting

In the past two days, the U.S. Comex gold futures (COMEX:GCG14) tumbled 2.87% to $1,224.90 after surging earlier in the week. During Asia's Friday morning, the gold futures rebounded about three dollars. The S&P 500 Index (CME:SPZ13) and the Euro Stoxx 50 Index fell 1.60% and 1.74% week-to-date while the CRB Commodities Index rose 0.54%. The Dollar Index (NYBOT:DXZ13) rose 0.39% on Thursday to 80.206 but fell 0.14% for the week. The 10-year U.S. government bond (CBOT:ZNH14) yield closed at 2.8773% on Thursday, the highest level since mid-September.

Stronger U.S. Sentiments

On Thursday, the U.S. House approved a bipartisan federal budget plan to avert a government shutdown in the next two years. The plan did not touch the entitlement spending or corporate taxes. The U.S. debt ceiling was not raised either, with a likely showdown between the parties in February. The removal of this uncertainty has lessened the appeal of gold as a safe haven. The U.S. retail sales rose by a stronger-than-expected 0.7% in November compared to a 0.6% rise in October. Stronger personal spending, expected to be 3.5% annualized, may help to lift the GDP growth in Q4. These stronger data have more than offset the weaker report shown by a jump in the latest weekly jobless claims to a two-month high of 368,000. The gold market is increasingly factoring in the possibility of a Fed tapering next week.

Near and Longer-term Factors for Gold

Lack of near-term positive gold price catalysts and the recovery in the stock markets have prompted holders of the SPDR Gold Trust to liquidate their holdings, which have fallen 39% this year to 827.6 metric tons. Expected near-term Fed tapering and the retrenchment of the largest gold consumer, India, due to its government's import curbs are the two big factors hurting gold prices this year. In the longer-run, the reduction in QE, which is expected to be gradual, and the very low real interest rate, are positive factors for gold. A 50-year chart of the gold price versus the S&P 500 Index shows that the current ratio of 0.7 is way below the long-term average of 1.13.

What to Watch

All eyes will be on the FOMC meeting on Dec. 17-18. We will also monitor the December flash PMI for China, E17, and the U.S. on Dec. 16, the November U.S. CPI on Dec. 17, the U.S. FOMC decision, the November U.S. housing starts, and the December Germany IFO business climate on Dec. 18 as well as the November U.S. existing home sales on Dec. 19.  

About the Author
Austin Kiddle

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

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