Gold futures traded nervously on Wednesday, falling 0.7% to $1,639.6, on the eve of the Spanish and French bond auction, and recovered slightly to $1,641.4 by the end of Thursday. The S&P 500 fell 1% while the Stoxx fell 3.5% in the past two days. The US 10-year Treasury ended below 2% for five days in a row.
Both Spain and France governments got what they targeted although the costs were higher. The yield on the 10-year Spanish debt jumped 34bp to 5.743% from the last auction in January. But the 10-year yield continued to rise after the auction to about 5.9%, approaching the critical 6% area.
The rising yield may bring in more official money for intervention. International Monetary Fund Director Christine Lagarde, who called Europe the "epicenter" of potential global storms, today believes she can reach her $400 billion goal of additional IMF lending capacity while the World Bank President, Robert Zoellick, stated that the European Central Bank needed to do more for Europe in addition to long-term refinancing operations. The expectation of more liquidity coming into the system may have given the gold price a reprieve.
However, there are more complex factors in play for gold price than just liquidity. In their Q1 2012 gold investment statistics commentary, the World Gold Council (WGC) explained that gold has had a challenging first quarter.
While investors speculated that a US recovery and rising US real rate would cause gold’s price to fall, the fact that gold demand is no longer just coming from the US and Europe, but from emerging countries such as China and India means that gold’s price may respond differently to changes in US real rates. Rising foreign demand for gold signals that gold is not just a dollar hedge but also a global currency hedge. Also gold has acted as hedges against asset deflation and inflation, both likely outcomes of the still-evolving European debt crisis.
While gold’s price seems to go up and down with equities in the short-term, the WGC clarified that gold's long-term relationship with risky assets, such as US equities, has been hovering around zero historically, which means gold acts as a good portfolio diversifier.
Next Monday's European Union 17 PMI data, the Akshaya Trithiya religious festival which starts on April 24 and next Wednesday's US Federal Open Market Committee meeting are key events to watch for gold investors.