Dovish Fed and Stock Valuations Help Gold

The U.S. Comex gold futures jumped 1.12% to $1,320.50 on Thursday after falling 0.24% the day before. Week-to-date, the gold futures have risen 1.30% while the S&P 500 Index and the Euro Stoxx 50 Index have plunged 1.67% and 2.29% respectively. The Dollar Index has also tumbled for five consecutive days by 1.36% to 79.383 on Thursday while the U.S. ten-year government bond yield has rallied 7bp this week to a low of 2.6474%, back to the level at the end of February.

Dovish Fed and Chinese Imports

In the March FOMC minutes, not only did the 6.5% unemployment rate threshold was let go but also several committee members were concerned that the higher projected median interest rates by the Fed members would convey a faster pace of tightening than was actually the case. The Fed Chairman Yellen urged the market participants to focus on the wording of the Fed Statement rather than the interest rate forecasts. All markets rallied on a sigh of relief that the Fed will keep its promise to hold interest rates for a considerable period of time. In China, the government takes another step to open up its economy by allowing the mainland Chinese investors to buy Hong Kong stocks through the Shanghai Stock Exchange and also allowing the foreign investors to buy into mainland stocks through Hong Kong. On the other hand, the analysts have brushed aside the poor March trade data from China, citing that the fake invoices have exaggerated the trade numbers before June last year.

Investors’ Positioning

According to the CFTC, the net combined long managed gold positions have declined for a second week by 11.4%, led by two consecutive weeks of a rise in the short positions. Traders are being swayed by the possibility of a stronger U.S. economy, the overvalued U.S. stocks, and the geopolitical risks in Russia-Ukraine. In the short-term, gold prices will again become tied to the FOMC policy expectations while gold will also act as a hedge against stocks.

What to Watch

We will monitor the Eurozone February industrial production and the March U.S. retail sales on 14 April, the Fed Chairman’s speech and the U.S. March inflation data on 15 April as well as Yellen’s speech, China’s March industrial production and fixed asset investments, and the March U.S. housing starts and industrial production on 16 April.