Will gold hold on to spectacular gains this quarter after Crimea?

Having risen 3.05% last week, the U.S. Comex gold (COMEX:GCJ14) futures have dropped 1.45% in the past two days while the S&P 500 Index (CME:ESM14) and the Euro Stoxx 50 Index (EUREX:FX.C) rallied 1.69% and 2.3% respectively. The CRB Commodities Index stays flat this week after a 1.4% drop last week.

The Dollar Index (NYBOT:DXH14) has barely moved with the level stuck at around 79.40. The U.S. 10-year government bond yield has traded in a range between 2.60% to 2.80% in the past two months and has rallied 10bp to 2.67% since March 7. As risk aversion has risen, the safe-haven bid for U.S. Treasuries has also climbed. 

Global stocks rebound
Russian President Putin’s comments that he will not split up Ukraine and the better U.S. economic data have boosted global stocks this week but weakened gold demand. A string of economic releases shows that the U.S. economy has stabilized after the bad winter weather. The February industrial production jumped 0.6% after declining 0.3% in February. The housing starts in February dropped slightly to 907,000 from the revised-up level of 909,000 in January. February inflation rose 0.1%, in line with the expectation while the core inflation has risen 1.6%, the same level as January. The market is also expecting the Fed to continue to cut bond purchases by $10 billion a month after the FOMC and to switch from the 6.5% unemployment threshold to a forward qualitative guidance. Going forward, the monetary policy will most likely be linked to a range of economic indicators. If this is the case, the strong correlation between the daily gold price swing and the unemployment data will diminish, according to Barclays.

Investors’ positioning and China’s gold reserves
The CFTC reported that the net long combined gold positions by speculators rose four percent during the week of March 11, led by a 20% reduction in the short positions. The total gold-backed ETF holdings according to Bloomberg have risen in three consecutive weeks, lending downside support to the gold prices. A recent Bloomberg Industry study shows that the gold reserves in China may be as high as 5,086 metric tons, compared to the official level of 1,054 metric tons, based on the net imports data from Hong Kong and China’s domestic output, reflecting the move by the Chinese to establish the Renminbi as a global currency. 

About the Author
Austin Kiddle

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

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