Commodity Update; Gold – 24 November 2014

Gold continues to advance on increasing central bank actions and economic uncertainty

Gold gained ground once again last week as actions from two of the world’s major central banks effectively topped up the punch bowl, while further survey data emerging from Europe continued to indicate a stagnating continental economy.

While the metal had risen steadily throughout much of the week, the biggest boost for prices came on Friday morning as investors awakened to news of a rate cut from the Chinese central bank, shortly before Mario Draghi signaled to europe’s bankers in Frankfurt that Quantitative Easing is on the way.

“We will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us. If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases,” – M Draghi, November 2014

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FOMC getting slightly more hawkish

The gains on the week for gold came despite that the FOMC meeting minutes on Wednesday were slightly more hawkish than expected, with some debate on whether or not to drop the long held pledge that rates will remain low for a “considerable time” after the point that asset purchases are ceased.

In greater detail, the US policy makers opted to leave the above piece of text in but to include an addendum with it that stated “rates could rise sooner or later than markets expect, depending upon the data”

All in all, the tone of the FOMC and recent events in Europe has now led many investors to begin betting that the Federal Reserve will be the first developed market central bank to raise interest rates which contrasts with previous expectations that the Bank of England would be the first one to move.

The evolving policy expectations have driven a sharp swing in GBP/USD, which has now fallen from a six year high in July, down to a 12 month low in November. Gold volatility has also increased as investors continue to weigh the impact of a deteriorating Europe, evolving monetary policy in North America and the still lingering presence of geopolitical risk.

For now, geopolitical risk and economic uncertainty appear to be winning the day in terms of gold prices however; we expect that this will be a relatively short-lived phenomenon.

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Looking Ahead

Looking to the immediate future, the week ahead sees US second estimate GDP figures followed by core durable goods data. The North American releases are followed by the euro-zone flash CPI, core CPI and unemployment estimates on Friday.

While there are wide expectations that Tuesday’s GDP numbers will confirm growth of 3.3% on an annualised basis during the previous quarter, Friday’s euro-zone inflation data is a wild card.

Although an at consensus growth number, or higher, from the US on Tuesday would be a negative event for gold, any indication on Friday that EU price pressures eased further during November could prompt markets to begin pricing in ECB action for as soon as next week (December Meeting). 

In addition to this, Swiss voters are set to vote on increasing the nation’s gold reserves over a five year period at the weekend; a move which could see demand for an additional 1,500 tonnes according to Bloomberg data. While opinion polls suggest the that it will be rejected; should the Swiss vote in favour of the move, then this could provide the impetus for a December rally in gold prices.  

SPOT GOLD // HOURLY INTERVALS

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GBP/USD & US DOLLAR INDEX

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