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Gold Torn Between Stimulus Expectations and Risk Trends

Gold Torn Between Stimulus Expectations and Risk Trends

Ilya Spivak, Head Strategist, APAC
Gold_Torn_Between_Stimulus_Expectations_and_Risk_Trends_body_Picture_5.png, Gold Torn Between Stimulus Expectations and Risk TrendsGold_Torn_Between_Stimulus_Expectations_and_Risk_Trends_body_Picture_6.png, Gold Torn Between Stimulus Expectations and Risk Trends

Fundamental Forecast for Gold: Neutral

Gold prices continued to sink last week, extending a downward trend that has already produced two consecutive months of losses, as minutes from the Federal Reserve’s March policy meeting reinforced a positive shift in the central bank’s assessment of the economy. This further scattered expectations of a third round of quantitative easing (QE3) and undermined demand for gold as a store-of-value alternative to paper currencies. The durability of downward momentum has been put at risk however after Friday’s US employment report fell deeply short of expectations, offering fodder to those investors still holding out hope for additional stimulus. If such views regain dominance across financial markets, gold is likely to find support once again.

Genuine reasons to question the sustainability of a stronger recovery in the US continue to linger. Indeed, both 2010 and 2011 began with a pickup that fizzled out by mid-year, the former because of a flare-up in the Eurozone debt crisis and the latter courtesy of an oil price spike. Similar scenarios remain on the radar this time around. Spain is starting to wobble again and Italy is still too big to fail with a debt burden that far exceeds the scope of existing ECB and EFSF/ESM firewalls. Meanwhile, tensions between Western powers and Iran have been downgraded from “boil” to “simmer” only recently and the possibility of re-escalation that could reignite oil supply worries and push prices higher is ever present.

On the US economic data front, news flow has increasingly failed to outperform relative to expectations. This can reflect a genuine deceleration or an overzealous catch-up in economists’ forecasts given the clearly firmer conditions that emerged toward the end of last year and into the first quarter, but in either case markets have been increasingly faced with disappointing outcomes. Friday’s employment figures were an excellent example of just how fragile growth remains, with very few redeeming qualities in the details of the report. The unemployment rate dipped to a three-year low of 8.3 percent but this reflected a 164K contraction in the labor force rather than stepped-up hiring, and the crucial retail sector led job losses with a 33.8K drop. This could be sending an ominous signal about the trajectory of private consumption, by far the largest component of GDP growth at close to 70 percent.

Looking ahead, gold appears likely to find support early into next week as markets returning from the Easter holiday have a chance to meaningfully price in the outcome and all of the worries about growth that it implies, which ought to bolster QE3 possibilities. For this move to have staying power however, additional evidence of a downturn will need to emerge to cement the jobs report as the turning point toward a new dynamic rather than a one-off outlier. With that in mind, traders will pay close attention to the Fed’s Beige Book survey of regional economic conditions and April’s preliminary University of Michigan consumer confidence reading (where expectations call for eighth consecutive increase to the highest level since February 2011). Scheduled remarks from a long list of Fed officials including Chairman Bernanke, Vice Chair Yellen and New York Fed President Dudley will also be closely examined for QE3 potential. - IS

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