Gold Investors Pondering FOMC Move Next Week amid Global Market Volatility
The U.S. Comex gold futures have dropped for two consecutive weeks for a total of 3.30% and are basically flat this week to end at $1,122.80 on Tuesday. On Wednesday morning in Asia, the gold futures have climbed 0.24%. Since the trough at the end of August, both the S&P 500 Index and the Euro Stoxx 50 Index have rebounded around five percent while the crude oil futures have jumped close to 20%. This week, the S&P 500 Index has surged 2.52%, the Euro Stoxx Index has climbed 1.69% while the crude oil futures have declined 0.24%. The Dollar Index has declined 0.25% this week to 95.985 on Tuesday. The U.S. ten-year Treasury bond yield has jumped 7bp to 2.197% on Tuesday while the ten-year German Bund yield has climbed 1bp to 0.675%. The VIX has halved from an intra-day high of 53.29% on 24 August to currently 24.90%.
Pulse of the Global Economy
In the U.S., the private payrolls added 173,000 workers in August while the unemployment rate dropped to 5.1%, within the range of the Fed’s estimate of full employment. The Eurozone Q2 GDP was revised upward to 0.4% quarter-on-quarter compared to 0.3% expected. The recovery was led by Germany and Spain while the growth was driven mainly by net exports and also consumption. Despite the improving economy, inflation can still drop lower if oil prices resume their decline, which means Europe is still not out of the woods. China’s trade surplus reached a record of $60.2 billion in August, driven by falling exports of -5.5% year-on-year and plunging imports of -13.8%. Weak global demand and sluggish construction demand in China were the culprits. To stabilize its currency, China sold down its FX reserves by $94 billion in August to $3.56 trillion with UBS estimating that capital outflow amounted to $170 billion. Apart from dipping into reserves, China has also tightened FX controls and trading in the forex market. China is unlikely to drop its currency much further for the fear of more capital flight and more competitive devaluation.
Gold Investors’ Positioning
With arguments on both sides regarding a Fed rate hike next week, the managed money net combined gold positions have continued to rise from -11,345 contracts as of 21 July to 44,416 contracts as of 1 Sep. The short positions have declined about 40% from 121,238 in July to most recently 74,446. As traders are getting less concerned for a rate hike next week, equities and industrial metals are staging a comeback and the dollar being on hold. Whatever the Fed does next week, the market expects a gradual path to tightening. The Fed Funds will be 0.60% a year from now according to Bloomberg. Still, institutions such as the IMF and the World Bank have warned the Fed not to hike rates in September.
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