The U.S. Comex gold futures surged 2.73% in the past two days to $1,279.90 on Thursday while the dollar index suffered a loss of 2.17%. The CRB Commodities index, the S&P 500 index, and the Euro Stoxx 50 index have rebounded 1.01%, 1.37% and 0.64% respectively on Wednesday and Thursday. The U.S. 10-year government bond yield rallied about 6bp in the same period.
Bounce After Bernanke
The U.S. Fed's speech, rather than the FOMC minutes, has moved the markets. Bernanke spoke after the market close on Wednesday, saying that the U.S. economy desires a highly accommodative monetary policy for the foreseeable future. The Fed wants to tell the markets that tapering the QE program does not equate to tightening the monetary policy, or raising the interest rates. The FOMC minutes reviewed that many Fed governors would like to see more signs of improvement in jobs before agreeing to tapering. Both risky assets and gold reacted positively to the dovish comments by the Fed. The most recent weekly jobless claims in the U.S. unexpectedly rose by 16,000 to 360,000. Equities also got a boost after the Bank of Japan has said that Japan is recovering moderately, and has upgraded its growth forecast for seven consecutive months.
Paper Investments versus Physical Demand
The CFTC reported that net short positions by speculators reached a record high of 129,616 contracts as of July 2. On July 11, Bloomberg calculated that gold-backed ETP holdings fell to 1,986.47 tons, the lowest level in three years. At the same time, physical demand has been improving. The Comex gold inventories have been depleting fast because the physical buyers in Asia have been taking delivery of gold. The total Comex and Nymex gold inventories have declined from 11 million troy ounces in February 2013 to about 7.1 million troy ounces in July, with the big drop in April and July this year. According to Standard Chartered, the one-month borrowing cost for gold rose to 0.3038% on July 10, back to the level of December 2008. If the market realizes that the Fed is still very accommodative, and the demand for jewelry, bars and coins continues to rise, then the gold shorts will likely be squeezed hard.
What to Watch
We will monitor China's Q2 GDP, June industrial production and fixed asset investments in addition to the June U.S. retail sales on July 15, the U.S. June CPI and industrial production on July 16 as well as Fed Bernanke's speech and the U.S. weekly jobless claims on July 17.