Watching Cyprus and Gold's Physical Demand

The U.S. Comex gold futures rose 1.35 percent this week and ended at $1,613.80 on Thursday. Gold has risen for three consecutive weeks, but has fallen 3.70 percent year-to-date. On the other hand, riskier assets such as the S&P 500 index and the Euro Stoxx 50 Index dropped 0.95 percent and 1.53 percent respectively while safe-haven assets such as the U.S. 10-year Treasuries rallied about 8bp this week.

The Fed Stays its Course

On 20 March, the Fed announced no change to the 0 to 0.25 percent Fed Funds target rate as well as the $85 billion a month asset purchase program. The Fed did acknowledge some moderate improvement in the economy and lowered slightly its projection for the unemployment rate in December 2013 to 7.3 to 7.5 percent. Most analysts are expecting a long and gradual exit of the Fed from the QE program. With the unemployment situation still far from normal, the 6.5 percent unemployment rate will not be reached and the interest rates will not be raised at least until 2015. Given the fiscal drag and the external developments, the Fed further warned of further downside economic risks. The gold futures immediately dropped close to 10 dollars upon the announcement but have now rebounded to a level higher than before the FOMC meeting.

Watching Cyprus on 25 March

The rejection of the bank levy by the Cyprus lawmakers and the ECB’s statement that it will cut off the emergency funds to Cyprus after 25 March unless the government agrees on the bailout terms with the EU and IMF have provided a bid to the gold prices. Although the Finance Ministers highlighted that Cyprus is a special situation, the European banking crises and contagious effects are very real while Italy still does not have a government. The March flash manufacturing and services PMI for the EU-17 fell to 46.5 in March from 47.9 in February. An out-of-control situation in Cyprus will set the recovery further back for Europe.

Data to Watch Next Week

At the time of writing, the Chinese March flash manufacturing PMI just came out much higher than expected at 51.7, revealing a continued recovery path. Apart from watching Cyprus, we will also watch the February U.S. durable goods order and the U.S. March consumer confidence index on 26 March, the E17 March consumer confidence index on 27 March, the March unemployment change in Germany, and the U.S. weekly jobless claims and the Japan February CPI on 28 March. Let us also keep an eye on the wedding and gold purchase season in India which will begin in April until early June.