US Fed Outlook vs. Greece on Gold

London (July 8)  The US Comex gold futures dropped 0.94% this week and fell 1.64% this month to end at $1,152.60. Month-to-date, the S&P 500 Index returned 0.91% while the Euro Stoxx 50 Index fell 3.74%. The CRB Commodity Index dropped 5.12%, with the crude oil futures plunging 12.01% just in seven days! This week, the ten-year U.S. Treasury bond yield dropped 12bp to 2.258% on Tuesday, the ten-year German Bund yield dropped 13bp to 0.64%, and the ten-year Italian bond yield rose 2bp to 2.264%. The Dollar Index surged from 95.485 at the end of June to 96.865 on Tuesday.

 Anticipating Fed and Preparing for Greece

 The market will closely monitor the FOMC June minutes this Wednesday. Will the Greece situation and other global developments affect the timing of the rate hike? For those five officials who predicted one rate hike this year, when would that rate hike likely to be? The U.S. May job openings were 5.36 million, higher than the 5.3 million expected. For every job opening, there are about 1.6 unemployed people, compared to 1.8 in December 2007. Stronger labour data raise the likelihood of the first rate hike this year. After the “No” vote to the lenders’ conditions, Greece is given until Sunday to accept a new package on the conditions of making new reform proposals. Bloomberg reported that the EC is preparing for a “Grexit”, with the triggers being the European governments stopping any aids to Greece and the ECB not supplying Euros to Greece.

 Gold Not Taking Off

 Analysts and traders explained recently the reasons that gold price has not taken off despite the macro uncertainty are due to the market’s beliefs that the contagions from a Greek default will be contained and there is a good likelihood of a U.S. rate hike this year followed by monetary policy normalization. Also, the falling commodities prices and the stronger dollar have pressured the gold prices lower. During the week ending 30 June, the managed money net combined gold positions fell to a trough of 21,480 contracts, declining 54% for the week, helped by a 17% increase in the short positions and a decline of nine percent in the long positions. A more severe Greek contagion, more dovish FOMC minutes, and weaker U.S. economic data are needed to turn around the weak gold sentiment.

Source: SharpsPixley