Gold reflects Fed's likely move

May 20, 2015 12:23 PM

After rallying 3.06% last week and 1.23% the week before, the Comex gold futures fell 1.52% this week to $1,206.70 on Tuesday. The S&P 500 Index rose 0.27% while the Euro Stoxx 50 Index surged almost three percent and the Dollar Index jumped 2.29% this week. The U.S. ten-year Treasury bond yield has backed up 15bp to 2.289% on Tuesday while the German ten-year Bund yield has rallied 3bp to 0.592% this week. The crude oil futures have dropped about six percent from its recent peak to $57.26 on Tuesday.

U.S. Growth and ECB Bond-Buying 
A surprise jump in the U.S. housing starts of 20.2% in April has arrested some fear that the U.S. economic growth has stalled in Q2 especially after a weaker than expected April retail sales and an eight-point plunge in the consumer confidence in May. The ECB recently caused a stir in the market. The ECB released to a few people before the public announcement of its plan to front-load its QE in May and June before the drop in the market liquidity in the summer. The Euro Dollar plunged over 2.6% in the past two days as a larger than expected European QE is bearish for the Euro Dollar.

Awaiting the FOMC Minutes
While the gold traders are keenly awaiting the April U.S. FOMC minutes on Wednesday for clues whether the Fed will raise rates this year, the fact remains that the global growth outlook has not improved much. The U.S. Q2 growth expectation has been reduced. The Eurozone GDP has risen only slightly from 0.3% in Q4 2014 to 0.4% in Q1 2015 while the latest Eurozone year-on-year inflation remains at 0%. China’s industrial production has risen only 5.9% year-on-year in April compared to the 6% expected while the fixed asset investment has risen 12% year-on-year compared to the 13.5% expected. All these point to a lower chance of the Fed raising rates this year, or if the Fed does raise rates, the pace will be slow. In fact, the managed money net combined gold positions rose 14.2% during the week ending 12 May. Given everyone's focus, the Fed’s move is likely reflected in the gold prices already.

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