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 Gold is trading in a choppy manner, generally within the confines
of yesterday's range. The yellow metal slightly exceeded yesterday's high
going into the London PM fix, but quickly retraced those intraday gains
following less than dovish remarks from a noted Fed dove.
Boston Fed dove Rosengren, speaking before the Greater Concord Chamber of
Commerce, suggested that the risk of a rate hike is greater than the market
thinks. Rosengren is an avowed dove and a voter this year, so his comments
appear to have caught the market a little off-guard. Treasury yield rose
along with the dollar, weighing gold in the process.
In my view, the market remains too pessimistic about the
fundamental strength of the U.S. economy, and the likelihood of removing
monetary accommodation is higher than is currently priced into financial
markets based on current data. — Eric S. Rosengren, President & Chief
Executive Officer, Federal Reserve Bank of Boston
The Fed funds futures market seemed unconcerned by
Rosengren's assessment, still showing the probability for a June rate hike at
8%. You also still have to look all the way out to December to find odds over
50%.
In a research
paper that probably more accurately reflect the market's view, Hedgeye
Senior Macro analyst Darius Dale says:
"... That in conjunction with a dramatically
compressed Fed Funds futures curve leads us to believe the Fed’s dovish pivot
has been largely priced into the most affected markets and it’s likely that
nothing shy of outright monetary easing will compress the forward rates
expectations any further. Specifically, the next rate hike isn't
being fully priced into the curve until April of 2018 (out from
October 2016 at the start of the year)!”
While the short-term tone remains mildly corrective to
consolidative, the underlying trend remains bullish. "There’s a risk-off
mentality across the spectrum of the markets, which is good for gold in the
long run," Bob Haberkorn, senior market strategist at RJO Futures told
The Wall Street Journal. "From where we’re at right here, I like buying
it on this dip."
First-quarter demand data from the World Gold Council was broadly supportive
of that strategy:
Gold demand reached 1,290 tonnes Q1 2016, a 21% increase
year-on-year, making it the second largest quarter on record. This increase
was driven by huge inflows into exchange traded funds (ETFs) – 364t – fuelled
by concerns around the shifting global economic and financial landscape.
The WGC went on to note that
global investment demand hit a seven-year high of 618 tonnes, up 122% from
the same period last year. The investment sector appears "likely to
benefit further from the improved outlook towards gold among a broad investor
base." This lead to the best Q1 price performance in three-decades for
the yellow metal, which gained 17% in the first three-months of the year.
On top of that, "central banks remained strong buyers" in Q1.
Official sector buying has provided a significant underpinning to the gold
market in recent years, limiting the downside even as prices were falling as
a result of outflows from paper gold. In fact, those outflows were the source
of much of the physical metal that moved from weak hands in the west to strong
hands in the east.
Now that western investors have a revived appetite for the yellow metal, they
are competing with those strong-hands. As we noted many times in recent years
when the gold was flowing west to east; the west is going to have to pay up if
they want any of that gold back.
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