Fed, the Middle Kingdom, and the Scots are Near-term Drivers of Gold

The markets in the first half of September have certainly been interesting. After bouncing back 0.41% in August, the U.S. Comex gold futures have tumbled 3.95% to $1,235.70 month-to-date while the Dollar Index has surged 1.6% this month to 84.074 as of 16 September. Year-to-date, the gold futures have risen 2.78% and the Dollar Index has jumped around five percent as the Euro Dollar has fallen 5.7% this year. So far this month, the S&P 500 Index has declined slightly by 0.13% while the Euro Stoxx 50 Index has risen 1.55% and the CRB Commodities Index has dropped 2.85%. The oil futures have shrugged off its recent low of $91.66, climbing to just below $95 on Tuesday. The U.S. ten-year government bond yield surged about 25bp to 2.59% this month while the ten-year Bund yield also rose 17bp to 1.059%.

Fed, China, ECB, Scots

The market is keenly watching whether the FOMC will drop the “considerable time” language for the near zero interest rates after the meeting on Wednesday, which would cause a hiccup in the U.S. ten-year bond yield and a knee-jerk reaction in the gold prices. Nevertheless, with the bond yield rallying this year and the long-term inflation gauge (5y5y forward breakeven) dropping to around 2.37%, near the bottom in the past three years, the market is not seeing a strong enough U.S. economy to cause the Fed to change actions. While China’s recent loan and economic data have been disappointing, the news that its central bank is providing about $81 billion in liquidity to the top five Chinese banks has boosted the equity, gold, and commodity markets on Tuesday. The ECB will kick off its TLTRO on Thursday to help jumpstart credit. The immediate focus will be on the Scots Independence Referendum and the longer-term implications for other breakaway movements in Europe. The geopolitical risks in Ukraine, Russia, and the Middle East continue to provide downside support for gold prices.

Gold Demand Outlook

According to the CFTC, the managed money total combined net gold positions have halved in the past four weeks to 71,376 contracts as the short positions have almost tripled. However, Barclays reported that the gold demand in China has picked up as the price went below 250 Yuan per gram. In India, physical buying has increased with imports doubling to $2 billion compared to $739 million a year ago. The two largest gold consumers will provide good support to the gold prices should prices tumble further.