Gold Prices Outperforming Major Indices in January

The U.S. Comex gold futures fell 1.51% last year but surged close to ten percent year-to-date, exceeding $1,300 again, a level last seen in August last year. This year, the gold futures have outperformed all other major market indices, with the Dollar Index rising 4.2%, the S&P 500 Index climbing 0.29%, the Euro Stoxx 50 Index jumping 5.7%, the CRB Commodities Index tumbling 29.55%, and the U.S. 10-year Treasury Bonds rising about 2.7%. The drama has been in the currencies where the Euro Dollar has fallen six percent and the Swiss Franc has jumped 15% against the dollar and 21% over the Euro month-to-date after the Swiss central bank has removed the cap of its currency against the Euro. The crude oil futures have plunged below $50 but may stabilize above the $45 level.

The ECB Delivers Sovereign QE
The ECB has finally decided to launch a comprehensive asset purchases program with a headline value of 1.1 trillion Euros, buying a total of 60 billion Euros a month, beginning in March until at least September 2016. This is more open-ended than the market has expected as the ECB wants to continue to purchase assets if the inflation does not reach its target of two percent by September 2016. Around 45 to 50 billion Euros of the monthly purchase can be for government bonds and agencies. The 19 national governments will share the risks and purchase 80 percent of the assets. The ECB leaves out Greece bonds for now until July and will buy its bonds if the new Greek government seals a deal with the Troika.

Implications for Gold Prices
The uncertainty of the European economies is confirmed by the ECB’s QE. The Fed may also delay raising interest rates given the uncertain outlook of many global economies due to deleveraging, weak growth, and plunging commodity prices. There have been surprised interest rate cuts from Turkey and Canada. With lower interest rates, weaker currencies (against the U.S. dollar), and the upcoming Greek elections, the safe-haven demand for gold has come back.

What to Monitor
We will monitor the outcome of the Greek parliamentary elections on 25 January. We will also watch the January Germany IFO business climate index on 26 January, the U.S. December durable goods orders and the new home sales on 27 January, the FOMC interest rate decision on 28 January, the Eurozone December loans to the private sector and the December Japanese inflation on 29 January as well as the Eurozone December unemployment rate and the U.S. Q4 preliminary GDP on 30 January.