There are some signs that tapering this year might be possible, with some better-than-expected data overnight. US GDP grew more than expected at 1.7% annualised vs. 1.1% for the preceding quarter. Other data showed business confidence grew, as did manufacturing and hiring. US 10-year treasuries spiked to a high of 2.69 before closing lower.
The gradual removal of tapering could potentially put upward pressure on government bond yields and the US dollar. Given the strong run-up in US equities - 18% ytd - it is difficult to see substantial upside unless we see strong forward corporate earnings. Investors will be focused more on the impact of tapering than forward projections.
Strong US GDP trickled down to oil and copper prices. Tighter supply kept WTI buoyant, with front-month futures rebounding to $105. The EIA reported a drop in supply from Cushing by 7.52 million barrels this month. Supply disruption concerns and tensions in the Middle East keep Brent at the $107 level.
Copper prices rebounded as well on China’s promise to keep 7% growth, and the prospect of a stronger US economy. Comex prices remain neutral to bearish; it will be interesting to review the price action after China’s PMI data today.
Gold has got back some of the love lost with increased fund flows from traders trading on a further rise in prices. Although the year-to-date performance is still dire at -21%, buyers have flocked back into the market with reports that hedge fund managers have increased trades on a further rally in gold. Attention turned to the precious metal after it dropped from a high of $1803 at the beginning of October 2012 to a low of $1179 on 28 June this year; an approximate price decline of 35%.
In the past 20 years, the percentage retracement in gold prices has been single digit, averaging under 10%. It was never as aggressive as the 35% we saw this year, which probably supports the argument that it was overdone. Looking at other commodity prices, there is a common denominator in that they have found a floor in June for the time being.
Looking ahead, if the Fed continues to favour stimulus and the US dollar remains weak, this will support gold prices in the short term. In addition, we expect interest rates to remain low for an extended period of time, even after the accommodative program ends. These are not supportive cases for precious metal prices to move higher as we expect growth in Southeast Asian economies to remain subdued on China’s deceleration.
We hold the view that gold prices have broken out of the downtrend. Our short-term view is that it has to stay above $1327, with an immediate target price of $1370.