Gold balancing two markets

The U.S. Comex gold futures (COMEX:GCG14) rose 0.32% to $1.229.40 after falling for three consecutive days. Year-to-date, the gold futures rebounded 2.25% while the S&P 500 Index (CME:SPH14) and the Euro Stoxx 50 Index retreated 0.50% and 0.60% respectively. Gold prices have strengthened in the face of a stronger dollar; the DXY index rose 1.21% this year. The U.S. 10-year government bond (NYBOT:DXH14) yield fell 2 bp to 2.9652% on Thursday after the Fed minutes release on Wednesday.

The Fed, ECB and the BOE

The recent Fed minutes revealed that the governors were generally in agreement with the QE tapering with most governors seeing the QE program to end by year-end. The forward guidance has calmed the gold market, which rose on Thursday. Janet Yellen, the next Fed chairman, sees a 3% handle in the U.S. GDP growth this year and will focus primarily on reducing the unemployment rate to a range of 5.2% to 5.8%. On Thursday, the U.S. latest weekly jobless claims dropped 15,000 to 330,000, compared to an expected 335,000. Both the ECB and the Bank of England kept interest rates unchanged. Latvia has just joined the euro. The ECB expects 1.1% 2014 GDP growth for the region although the unemployment rate is still stuck at 12.1%. The worry is on inflation, which is at less than half of the ECB's two percent target.

Two Types of Gold Markets

While speculators have reduced their net long gold positions from a high of 254,000 contracts in August 2011 to around 34,000 contracts as of year-end, the physical market has been booming. The Royal Mint has sold out all their debut gold bullion coins in just two days. The Australia's Mint gold coins sales surged 41% while the U.S. Mint sales rose 14% in 2013. The downside of gold prices has been capped by the longer-term buying by the central banks and the individual investors. The longer-term physical demand will continue to balance out the shorter-term speculative paper markets.

What to Watch

The market will focus on the December non-farm payrolls and the unemployment rate in the U.S. on Jan. 10 to gauge the pace of the Fed tapering. We will also monitor China's Q4 GDP, China's December industrial production, the E18 December industrial production, and the U.S. December retail sales on Jan. 14, the ECB monthly bulletin and the December U.S. CPI on Jan. 16 as well as the U.S. December housing starts on Jan. 17.

About the Author
Austin Kiddle

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

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