Rising Stocks and Bonds Outshining Gold
The U.S. Comex gold futures have dropped 2.74% this week to $1,256.30
while the S&P 500 Index has climbed 1.05% and the Euro Stoxx 50
Index has risen 1.39%. In the same period, the Dollar Index has climbed
0.13% to 80.494 while the U.S. ten-year government bond yield has
fallen 7bp this week to 2.464%. Interestingly, the Spanish ten-year
government bond yield has plunged to a multi-year low of 2.822% on
Wednesday and is now trading at an almost four-year low spread of 150bp
versus the German ten-year Bund yield.
Worldwide Bond Surge and Stock Rally
As the Financial Times has pointed out, this year’s paradox has been a
concomitant rise in the stock prices and bond yield in the U.S. and
Europe. One reason to explain the demand for safe haven bonds is the
compression of the periphery European bond spread over Bunds, possibly
driven by the expected ease by the ECB next week as economic recovery
and inflation are both weak. The market has also dismissed on Thursday
that the U.S. Q1 GDP (second release) has contracted one percent owing
to the bad weather. The S&P 500 Index has reached a new high on the
same day. With the momentum of the stock and bond prices both picking
up and the Dollar Index rallying, gold has retreated to the background
and has declined to a low since early February.
Other Factors to Consider
As the gold prices are trading near the marginal production costs of
many mining companies, the lower gold prices are simply not sustainable.
Also, HSBC’s analyst has pointed out that China’s demand for
jewellery, gold coins and bars will drive gold prices this year.
Currently, China is consuming about half of the world’s annual
production. Gold production will likely decline from the high reached
in 2013.
What We Are Watching
We will monitor China’s May NBS manufacturing PMI on 1 June, the May
final manufacturing index for the Eurozone and the U.S. on 2 June, the
Eurozone April unemployment rate on 3 June, the Eurozone preliminary Q1
GDP on 4 June, the Bank of England and the ECB monetary policy
announcements on 5 June as well as the May non-farm payrolls and the
unemployment rate in the U.S. on 6 June.
30 May 2014 | Categories: Gold
