If higher interest rate is accompanied by a rising inflation rate, real interest rate will not necessarily rise rapidly, lending some support to gold prices.
LONDON: The U.S. Comex gold futures have plunged 3.09% to $1,294.70 on Thursday and traded as low as $1,289.60. Month-to-date, the gold futures have declined 2.09%, the first monthly decline this year. Year-to-date, gold has trimmed its gain to 7.69%. In the past two days, the S&P 500 Index has declined 0.87% while the Euro Stoxx 50 Index has climbed 1.20% while the CRB Commodities Index has jumped 1.04%. The Dollar Index has traded above 80 this week. The U.S. ten-year government bond yield has declined 6bp this week to 2.681% on Thursday.
Looking at a stronger Q2 in the U.S.Gold prices have had a tough week since the Fed has voiced the time frame for an interest rate hike last week and the stronger U.S. data this week The most recent U.S. jobless claims fell to a three-month low to 311,000 during the week ending 22 March while the final U.S. Q4 GDP came out stronger than previously estimated. Analysts believe that the stronger U.S. data point towards a fundamental improvement in the economy.
Fed Governor Evans remarked on Thursday that interest rates could rise in the second half of 2015 because of an expected rise in inflation. If higher interest rate is accompanied by a rising inflation rate, real interest rate will not necessarily rise rapidly, lending some support to gold prices.
Physical demand support also looking stronger
As the Indian general elections loom near and the wedding seasons arrive, the jewellers are expecting that the government will relax the ten percent import duty on gold in order to help the local jewellery industry to recover. As a result, India's import demand should exceed that in 2013.
According to a study on China's physical demand in "In Gold We Trust", China has withdrawn 488 metric tons of gold year-to-date from the vaults of the Shanghai Gold Exchange (SGE), a 29% increase versus the same period last year. Various studies have supported that the gold withdrawal from the SGE is the best gauge of China's physical demand. With the Chinese looking to quicken the pace of the Renminbi internationalization, the government will continue to increase its gold reserves, albeit secretly, to back up its currency.
What to watch
We will monitor the Fed Chairman Yellen's speech on 30 March, the March Germany unemployment change, the final PMI for China, E18, and the U.S., and the February E18 unemployment rate on 1 April, the March U.S. private payrolls on 2 April, the ECB interest rate decision and its press conference on 3 April as well as the U.S. March non-farm payrolls and the unemployment rate on 4 April.
Courtesy: Sharps Pixley