Gold prices reacted to a more direct Fed

March 21, 2014 05:22 AM

U.S. gold (COMEX:GCJ14) declined 3.35% week-to-Thursday, the biggest weekly percentage loss since the weekly change as of 22 November last year. Year-to-date, the gold futures have climbed 10.66%. The S&P 500 Index (CME:ESM14) and the Euro Stoxx 50 Index (EUREX:FX.C) fare better this week, climbing 1.68% and 2.80% respectively. The U.S. Dollar Index (NYBOT:DXH14) rebounded and ended at 80.192 on Thursday, rising almost one percent this week. The CRB Commodities Index declined 1.13% on Thursday, the biggest percentage drop since 20 June last year. The U.S. 10-year government bond yield has also jumped 10bp to 2.7725% on March 19 after the FOMC meeting.

U.S.-centric Week
The latest weekly U.S. jobless claims were lower than expected at 320,000, the February existing home sales monthly change was in line while the March Philly Fed Outlook jumped to 9 from -6.3 in February. The Fed, as expected, tapered its QE by $10 billion on 19 March. The stocks, bonds, and gold markets were clearly caught off-guard when the Fed Chairman Yellen remarked in an interview in the Press Conference that the interest rate would rise around six months after the end of the asset purchases, which is expected to be before the end of this year. In the prepared FOMC meeting minutes, the interest rate was said to stay low for a considerable period of time. Yellen added that if the inflation rate, currently at 1.2%, would stay below two percent, then the Fed Funds rate will stay low longer. The Fed officials expect the Fed Funds rate to rise to one percent in December 2015 and 2.25% in December 2016, based on the median estimate. The Fed Funds futures now show a 62% probability that the Fed Funds rate will first increase in June 2015.

Other Factors on Gold
With inflation staying low, rising nominal interest rate will lead to a jump in the real interest rate, which will likely cause the gold prices to trade lower. The physical demand for gold in China remains quiet after the Chinese New Year amidst the recent rise in the Renminbi volatility. China’s gold prices continue to trade near a four-dollar discount to London cash gold prices although volumes have reached a three-week high. The Russian-Ukraine conflict seemingly has moved to a regional arena despite the U.S. imposing financial sanctions on 20 senior government Russian leaders and businessmen who are close to Putin.

What to Watch
We will watch the March flash manufacturing PMI from China, E18, and the U.S. on March 24, two Fed officials’ speeches, the March Germany IFO Business Climate Index, and the February U.S. new home sales on March 25, the U.S. Q4 final GDP and the Japanese February inflation rate on March 27 as well as the U.S. February core PCE price index on March 28.

About the Author

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