Gold Price Volatility Jumped while Yellen Remains a Dove

New York (July 16)  The U.S. Comex gold futures dropped 2.3% on Monday, the largest daily percentage decline since mid-December last year. The futures fell a further 0.7% on Tuesday to $1,297.10 before stabilizing during Asia’s Wednesday morning. The Dollar Index rose 0.25% this week to 80.39. The S&P 500 Index rose 0.29% while the Euro Stoxx 50 Index was flat and the CRB Commodities Index fell 0.35% in the past two days. The ten-year U.S. government bond yield rose 3bp to 2.547% this week.

Yellen Speeches in the Spotlight
 The Fed Governor Janet Yellen testified on the monetary policy to the Senate Banking Committee on Tuesday and will testify to the House Financial Services Committee on Wednesday. So far, the governor has reiterated the need for accommodative monetary policy because in her mind, the labour market has not improved sufficiently given the record high number of long-term unemployed, the low labour participation rate, and weak wage growth. However, the gold traders have negatively reacted to her statement that if the labour market would improve quicker than forecasted by the Fed, then a rise in the Fed Funds rate would be sooner than anticipated. Currently, the Fed governors expected the interest rate to rise to 1.13% at the end of next year; this is a faster pace of rate increase than currently priced into the market. The governor also warned that the valuation in some market segments, including the biotechnology and social media stocks and leveraged and junk debt, is stretched.

Chinese Growth and Gold Demand
 China managed to beat market expectation and grew at 7.5% year-on-year in Q2 given the increased infrastructure spending, tax cutting, and targeted reserve ratio cuts. The June industrial production rose 9.2% year-over-year compared to 9.0% expected. The retail sales rose 12.4% and the fixed asset investment grew 17.3%, both in line with expectations. The evidence of economic recovery should support gold demand. According to the analyst Koos Jansen, Chinese wholesale private gold demand reached 973 metric tonnes this year as of 4 July as measured by the withdrawal from the Shanghai Gold Exchange vaults (all gold supply has to be sold through the Exchange in China), and the long-term uptrend for physical demand remains intact. On another note, the World Gold Council recently mentioned that with historically low credit spreads and low market volatility across many assets, gold can be added to the portfolio as a diversifier to reduce long-term portfolio volatility.