The gold price (COMEX:GCG14) has been subdued this week as a result of better-than-expected data from the U.S. economy and U.S. stock-index performances which are either near or at record (or multi-year) highs.
Both U.S. and other world stock markets are seen as competitors to the other asset classes, including precious metals. It seems that until the air begins to leak out of this stock market bubble competing asset classes will continue to struggle.
Low inflation, a mixed bag for gold
Inflation readings for both the U.S. and Eurozone were released yesterday.
The December U.S. consumer price index showed core inflation rose by just 0.1%, annual consumer prices climbed by 1.5% in 2013, down from 1.7% climb in 2012. The common perception that gold acts as a hedge against inflation will no doubt cause the gold price to suffer, as a result of this data.
Deflation in the Eurozone was a cause of great concern last year and looks like it may continue to be so in 2014. Yesterday inflation figures released showed inflation to be way off the 2.0% target, at just 0.3% in November. However Bundesbank President, Jens Weidmann, said there is only a slight chance of deflation spreading through the Eurozone. Whilst deflation may not be present, there is clearly a trace of disinflation in some areas, a negative environment for the gold price.
Despite the release of inflation data, gold barely reacted. However, there is little data, political or monetary events for the yellow metal to grab onto to give it some traction. No news is bad news for gold as it creates an environment where competing asset classes, such as US stocks, can be inflated, pushing precious metals out of favour.
However, the ‘alarmingly’ low level of inflation will cause markets to expect the ECB to whip out the big guns of monetary easing. It is also likely that the ‘tame’ levels of inflation seen in the US will affect the pace of tapering to be decided by the FOMC next week.
How will old yeller react to new Yellen?
Gold is likely to be treading water ahead of the Fed’s first FOMC meeting, when Chairwoman Yellen will take the top seat for the first time. The shocking labour statistics last week, combined with positive economy data and low inflation this week will play a major role in the tapering plan, which many had previously assumed to be aggressive going forward. Gold is likely to see a major move following the meeting, however we are unlikely to see new highs or lows in the preceding days.
Institutional buying seems to be ticking up this year, as the number of open positions in COMEX gold futures have increased since the beginning of 2014. This is despite low inflation levels, which suggests ongoing concern over inflation and short-covering.
Demand to buy physical gold remains strong
Physical demand from China remains strong. Premiums on the SGE have halved in the last week, whilst volumes have been higher; a sign that Chinese banks have picked up their imports and are delivering onto the SGE.
Physical buying in India is also set to remain steady as citizens look to buy gold ahead of the wedding season. Reuters reports this morning that exports of gold jewellery from the country fell by 30% to $443.19 million, in December from the previous year. Given the near 28% fall in the gold price, this data perhaps suggests that there was little change at all despite government imposed restrictions