Gold futures climbed to $1,392.60 on the Comex yesterday, a six-month high, following the vote in Crimea to become a part of Russia. However this morning they have fallen by about 1 percent ahead of the FOMC meeting and some profit taking.
Global equities rose, pushing gold down, as President Putin’s comments on Crimea saw tensions ease over the situation. Gold is now at its lowest level in a week.
This is not surprising. We warned in recent posts that the main driving forces for the gold price in recent weeks have been temporary and very emotive factors – namely the potential standoff between Russia and the West.
Whilst Putin appears to have pledged that he won’t look to move into any other parts of the Ukraine, the US and Europeans have also backed off and have only issued minor sanctions on Russia. Any threat of major sanctions now appears to have subsided.
Look out for prices of platinum and palladium, both are affected by the Russian economy and recent events may have appositive impact.
Confusion over China effect on gold
The other factor affecting the gold price at the moment is concerns over China’s economy, namely the bursting of the credit bubble and the slowdown in economic growth.
Whilst some safe-haven demand is coming thanks to concerns over China’s economy, these slowdown is also likely to slightly affect physical gold demand.
Physical gold demand is declining as purchases of coins, jewellery and bars, which helped to support prices last year are starting to slow amid the price gains. Physical demand in China is expected to drop 17 percent in Q2 from 2013 figures, according to the China Gold Association. Much of this decline is driven by the forecast slowdown in economic growth.
Financial events in China will also affect the gold price as the yellow metal is used as collateral in financial arrangements. Goldman Sachs estimates that those transactions using gold, iron and copper as collateral account for as much as 31% of China’s total short-term foreign-exchange loans.
FOMC anticipation pushes gold down (again)
As alluded to above, the March meeting of the FOMC will continue to have an impact on the old price prior to the Committee’s statement release tomorrow.
The FOMC are expected to announce a further $10 billion cut in their monthly asset purchases, following ‘strong’ payroll data last month. Any weak economic data has so far been blamed on the poor weather since the start of the year.
Whilst it might be highly anticipated that further tapering will be announced market participants will be looking at every word in the FOMC’s statement to see how they plan to react to weak economic performance and any come-back from recent weather conditions.
EU data points to further stimulus
Inflation data in the EU, released yesterday, showed Ian increase of 0.3% this year and 0.7% year on year. Despite the climbs these numbers are below expectations and will no doubt give the ECB rather incentive to implement further monetary stimulus.