Gold Fundamentals to Improve Despite Still Weak Sentiment
The U.S. Comex gold futures have dropped 1.15% in the past two days to $1,125 on Tuesday after rising 1.88% last Friday subsequent to the FOMC announcement. The S&P 500 Index has dropped 0.78% this week while the Euro Stoxx 50 Index has fallen 2.52% and the crude oil futures have rebounded 2.57%. The Dollar Index has risen for three consecutive days by 1.83% after the Fed has delayed the rate liftoff last Thursday. The U.S. ten-year Treasury yield was 2.294% last Wednesday and was 2.134% on Tuesday while the German ten-year Bund yield was 0.773% and 0.589% for the respective dates.
After the Fed
Despite the dovish outlook and comments on global growth and inflation from the Fed after the FOMC meeting last Thursday, the U.S. Dollar has surged in the past three days against its major peers. Comments from the Fed President Lockhart and three other Fed presidents that they remained confident that the U.S. rates will take off this year have propped up the Dollar. The market is awaiting more clarity on the Fed’s action from Yellen’s speech this Thursday. On the other hand, the ECB is standing ready to do anything to fight deflation, meaning more QE, should the global environment threaten the ECB’s inflation goal. At the same time, the futures market is giving a 47% chance for the Fed to move in December. While recent Chinese government officials appear to support a seven percent GDP growth, the slowdown in China’s demand in the face of excess supplies in commodities has continued to hurt the commodity complex.
While most of the commodity markets face excess supplies, the case for gold looks different. Barrick Gold and Newmont Mining have cut back on spending and sold assets to reduce debt and conserve cash. Gold production may have peaked. More industry consolidation means that only those who are large enough and have cash can survive in this low pricing environment. In the meantime, physical demand continues to be very robust in August and September with Q3 U.S. Mint gold sales expected to exceed those of the previous two quarters and the gold premiums to continue to rise. Russia also added 32 metric tons of gold in August, the most since September 2014.
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