The U.S. Comex gold futures jumped 2.14% to $1,202 on Thursday, climbing the most since May 13 thanks to the more tempered outlook from the Fed’s Chair. The S&P 500 Index rose 1.21% while the Euro Stoxx 50 Index was flat in the past two days. The gold futures have risen 1.51% this year compared to 4.03% for the S&P 500 Index and 12.48% for the Euro Stoxx 50 Index. The U.S. 10-year government bond yield dropped 6 basis points this week to 2.334% on Thursday while the German 10-year Bund yield dropped 3bp this week to 0.805%. The Dollar Index dropped one percent this week to 94.03 on Thursday.
A December U.S. Rate Liftoff?
The interest in Greece took a back seat after the FOMC meeting on Wednesday. The finance ministers meeting with Greece failed without a deal although the ECB did increase the emergency liquidity to Greece by 1.1 billion Euros. Greece subsequently asked for three billion Euros more, showing how desperate the Greece situation is. The lenders and Greece will meet in Brussels on June 22 again.
The Dollar weakened and the gold prices rose after the Fed’s lower interest rate projections and Yellen’s more dovish outlook. Seven members of the FOMC instead of three in March predict one rate hike or none in 2015. Also, the Fed has lowered the median projection of interest rates from 1.875% in March to 1.625% in 2016 and from 3.125% to 2.875% in 2017. Yellen also wants to see stronger consumer spending and a higher labour participation rate and wage growth before lifting rates. The recent CPI ex-food and energy in the U.S. was 0.1% compared to 0.2% expected while the CPI increased 0.4%, confirming the Fed’s gradual stance.
Drivers of Gold
In the short-term, forces weakening the dollar such as lower rates expectations and lower inflation versus those strengthening the dollar such as “Grexit” will influence gold prices. According to the panelists at the Precious Metals Forum in London, the U.S. dollar direction will continue to be the biggest driver of gold. U.S. interest rates, China and India gold demand, geopolitical-economic crises, and inflation will also be important factors.
What to Monitor
We will watch the 22 June Brussels meeting on Greece as the final moments of the Greek endgame arrive. We will also monitor the June flash manufacturing PMI for China, the Eurozone, and the U.S. on 23 June, the Jun Germany IFO business climate index and the U.S. final Q1 GDP on 24 June as well as the May U.S. core PCE price index and the May Japan CPI data on 25 June.