Can gold rally be trusted?

The U.S. Comex gold (COMEX:GCG14)futures kicked off the year with a 3.14% gain in January. The prices fell 1.91% last week after rising for five consecutive weeks. This week, gold futures rebounded 0.89% albeit with some volatility as equities have rebounded on Tuesday. After falling for three weeks and declining 5% year-to-date, the S&P 500 Index plunged 2.28% on Monday but rebounded 0.76% on Tuesday. The Euro Stoxx 50 Index fell for two consecutive weeks and plunged again this week by 1.71%. The dollar Index dropped 0.23% in the past two days. The unexpected winner is the U.S. 10-year government note yield, which has rallied 40 basis points this year to 2.6294% on Tuesday.

Ongoing Global Expansion Despite Equities Slump

While China started off the week with the January official manufacturing PMI at 50.5, a six-month low, and a worsening services PMI at 53.4, the January global PMI remained steady at 52.9, just slightly down from 53 in December. The Eurozone final manufacturing PMI was higher than expected in January. The U.S. ISM fell in January to the lowest level since May 2013 due mainly to the horrendous weather conditions. The Japan manufacturing PMI has risen six months in a row. While some economists are already revising down the U.S. GDP growth estimates due to the weaker economic survey, many still expect the Fed to continue to taper given the ongoing broader recovery. A rebound in the stocks with supportive economic growth can dampen the gold price rally going forward. 

Investors Demand and Positioning

According to the CFTC, the net combined managed money gold positions rallied 40% during the week ending Jan. 28, led by a 16% reduction of short positions and a 5% increase in long positions. The U.S. Mint sold over 91,000 ounces of gold coins in January, a nine-month high. However, the Shanghai Gold Exchange volume has already tapered as the Chinese are enjoying their week-long New Year holiday. The client net gold buying index tracked by London-based BullionVault fell to an 18-month low last month as equities have been rallying. Any surprises concerning this Friday's non-farm payrolls will also move the gold prices. 

 

About the Author
Austin Kiddle

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

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