Gold remains corrective after retreating initially on the heels of the Crimean referendum. While the annexation of Crimea by the Russian Federation is progressing, and the situation remains tense, markets seem relieved that there wasn’t an immediate escalation.
As the FOMC begins its two-day meeting, they can keep negative price risks on the agenda. February CPI came in at a weak +0.1% m/m, which was in line with expectation, but the annualized pace tumbled to 1.1%. That’s down from 1.6% y/y in January.
Despite deflationary pressures, tepid growth prospects and a weak jobs market, the Fed is widely expected to announce a further tapering of $10 bln per month tomorrow. This is the first FOMC meeting presided over by Janet Yellen, but anticipate Bernanke-esque boiler-plate about leaving rates low for an extended period of time and being ready to change policy if economic conditions warrant.
Given the likelihood of persistent geopolitical risks and the fact that ongoing tapering is priced into the market, the recent dip in the gold price is likely to attract buying interest. Chinese physical demand remains robust, with 83.6MT imported through Hong Kong in January. While that’s down from the 91.9MT imported in December, it’s up a remarkable 369% versus January of last year.
Additionally, Koos Jansen reported last week that 454MT of gold has been withdrawn from the Shanghai Gold Exchange year to date. Any notion that Chinese demand for physical gold is waning because the price has risen is at best premature, and at worse, pure fiction.