Commodity Update; Gold – 14 October 2014

Gold the main benefactor of the week’s losses for equities and US dollar fx

Gold staged a brief recovery last week as fears over eurozone growth deepened while minutes from the most recent FOMC meeting also caused investors to second guess their expectations for developments in US monetary policy.

In detail, the IMF reduced its forecast for German growth in 2014 from 1.9% down to 1.4%. This followed what was, according to data released this week, the economic powerhouse’s steepest drop in industrial production and factory orders since the aftermath of the financial crisis in 2009.

Factory orders plummeted 5.7% while industrial production contracted by 4% for during the month of August, prompting fears among investors that October’s Q3 growth figures may show Europe’s largest economy slipping into recession.  

In addition to the poorer data emerging from Germany, Mario Draghi and Wolfgang Schaeuble clashed at the annual IMF meeting in Washington over the direction of monetary policy in Europe. This was as the ECB president used his opportunity to address the delegation by calling upon continental governments to ease fiscal policy where budget constraints permit such moves, while the German finance minister reiterated his prescription of greater budgetary discipline.

The conflicting policy ideas brought to the fore previous concerns that despite the best of intentions, the ECB may find itself hamstrung by the German government when it comes to implementing the policy measures that many believe the continent desperately needs.

Each of the above contributed to the impetus for investors to buy gold, while dovish statements for US policy and a pullback in the dollar are widely credited with having done the rest.

Going forward, we expect a certain degree of resilience in gold for the length of time that concerns over global growth persist, most notably in light of the metal’s failure to decisively break below the $1180 price barrier. Having said this, we also see strong resistance against further price rises at both the $1244 and $1264 price levels.

Spot Gold with US Dollar Index Overlay

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