Sparkling Gold Price Performance is Not Just a Weak Dollar Story

 

The U.S. Comex gold futures rebounded 1.54 percent on Thursday after falling 0.75 percent on Wednesday when the market worried that the crises in Spain and Greece were worsening, leading to a 2.72 percent sell-off in the Euro Stoxx 50 Index. The S&P 500 index rebounded 0.96 percent while the Euro Stoxx 50 Index rose 0.30 percent on Thursday. The 10-year U.S. Treasury bond and the 10-year German Bunds rallied 10bp and 14bp respectively while the 10-year Spanish bond surged 18bp this week.

Weaker economic data from the U.S. and Europe and renewed concerns in Europe have prompted some flight to quality to bonds. The August U.S. durable goods order fell an unexpected 13.2 percent while the U.S. Q2 real GDP growth was revised down from 1.7 to 1.3 percent. The Philadelphia Fed President Plosser doubted that QE3 could revive economic growth. The Eurozone economic confidence index fell from the 107.5 level in February 2011 to 85 in September 2012. The Spanish government has just approved more austerity measures by cutting spending and raising taxes further.

According to Bloomberg, the August Chinese year-on-year industrial profit net income fell for the fifth month by 6.2 percent. With the prospect of not hitting its 2012 growth target, the Chinese government may announce further stimulus and rate-cutting measures and IPO reforms to boost growth and rescue the stock market. Such speculation has boosted global stocks and gold prices on Thursday.

While the gold spot price looks likely to rise about 11 percent in Q3 to about $1,777, it is still about 7.5 percent lower than the recent peak reached on 6 September, 2011. But analysts pointed out gold price has just recently peaked in Indian Rupee, Euro and Swiss Franc terms, indicating monetary stimulus particularly benefits gold and this is not just a weak dollar story.

Next week, some important data to follow will be the September China manufacturing PMI, the September U.S. ISM manufacturing index and the final September Eurozone PMI on 1 October, the U.K., ECB interest rate decisions and the U.S. September FOMC minutes on 4 October and finally the September U.S. non-farm payrolls and unemployment rate on 5 October.


Austin Kiddle
Sharps Pixley, London
www.SharpsPixley.com

 

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