Sharps Pixley sees continued volatility in gold price after rate cuts by China, Australia

London bullion broker Sharps Pixley looks to monetary and political policies as the key drivers of volatility in the near term gold price.

Gold futures had a big turnabout in the past 48 hours. From last Friday to this Wednesday, gold futures surged 4.6%. On Thursday, prices slumped 2.8% to $1,588, the biggest one-day drop since early April. This week, gold futures have dropped 2.1%, compared to last week’s rise of 3.4%. In the past two days, the S&P climbed 2.3% while the Stoxx went up 2.7%. The EUR/USD rebounded 1% this week while the Dollar Index fell 1%.

Gold prices have jumped in anticipation of more easing from the U.S., Europe and China. Real GDP growth in the US has dropped from a recent peak of 3% in Q4 2011 to 1.9% in Q1 2012. In Q1 2011, the euro Area grew by 2.4%; it contracted by 0.1% in Q1 2012. Chinese GDP growth went from 9.7% in Q1 2011 to 8.1% in Q1 this year, and the expected Q2 growth may drop to 7.9% or lower.

On 5 June, Australia cut its interest rates by 25bp, the first cut in 3 years. On 7 June, the PBOC (the Central Bank of China) announced they would cut the 1-year lending rate and the deposit rate by 25bp. This move signals the beginning of China’s rate cut cycle to help investment and consumption. China last cut its interest rates in December 2008. The ECB, though kept interest rates unchanged, revealed that several Council members voted for an interest rate deduction. In today’s testimony to the Congress, Ben Bernanke did not announce any new actions, though he said the Fed still has easing options, citing that Europe is the biggest threat to the US economy and financial system.

In the short-term, gold price will continue to be pushed around by traders’ speculations on easing. The fundamental issues remain that global growth has entered a soft patch, sovereign funding costs in many European countries have continued to rise, the US fiscal policy has been tightened, and China’s excess capacity has jumped. The world may well come to a loosely-coordinated monetary easing. With such low real interest rate and bond yield, gold stands out as a cheaper alternative asset.

The most important events to anticipate this month will be the 17 June Greek re-election, 18-19 June G20 meeting and the 19-20 June FOMC meeting.

 

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