INV: Gold price moves close to seven-day low on improving US economy
iNVEZZ.com, Thursday, July 31: Gold has been little changed today, trading close to its lowest point this week as markets weigh signs of an improving US economy against armed conflicts in the Middle East and Ukraine.
The Federal Open Market Committee (FOMC) released a statement yesterday at 19:00 BST after a two-day policy meeting. The FOMC cut its monthly asset purchases by a further $10 billion – bringing the total down to $25 billion a month, in line with expectations. However, the committee outlined areas in which it thought the economy had further room to improve, focusing on the labour market, despite an unexpected drop in unemployment.
The FOMC commented: “Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has moved somewhat closer to the Committee's longer-run objective. Longer-term inflation expectations have remained stable.” Terry Sheehan, an economic analyst at Stone & McCarthy Research Associates in Princeton, New Jersey, told Bloomberg the statement “reflects Chair Yellen’s firmly held belief that there’s still major slack in the labor market and as part of their mandate they need to continue to provide accommodation for some time”.
The FOMC noted: “The Committee continues to anticipate […] that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.” The remarks reiterated the Fed’s earlier stance, with Charles Plosser, president of the Federal Reserve Bank of Philadelphia, dissenting because “such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals,” he argued.
US second quarter GDP grew at a four percent annualized rate after contracting 2.1 percent in the first quarter. The median estimate of 80 economists polled by Bloomberg had called for a three percent advance. Consumer spending, the largest component of the economy climbed by 2.5 percent, reflecting the biggest gain in purchases of durable goods in almost five years.
On the New York Mercantile Exchange (NYMEX) gold futures for August delivery were down 30 cents to $1,294.60 a troy ounce as of 10:51 BST. The price has shed 2.5 percent so far this month, as the ICE U.S. Dollar index rose two percent over the period. Bullion advanced 5.5 percent in June, and is up 7.2 percent in the year-to-date. Reuters’ technical analyst Wan Tao thinks gold is set to break its support at $1,292 and tumble to $1,284 based on the price’s wave pattern and a Fibonacci projection analysis.
UBS analysts said in a note today: “A strengthening dollar over the past month has also been an obstacle for gold. Although gold's inverse relationship with the US dollar has weakened of late - to -0.12 versus a low of -0.80 in February - it remains firmly in negative territory. Indeed, the correlation between gold and the trade-weighted US dollar index has consistently been negative over the last 14 months. A continuation of the uptrend on the back of strong US economic data in the weeks and months ahead would not bode well for the yellow metal.”
“Positive U.S. economic data is good for the dollar and bad for gold,” Lv Jie, an analyst at Cinda Futures Co., a unit of one of four funds in China created to buy bad debt from banks, told Bloomberg. “Geopolitical concerns still exist for support but the longer-term downtrend is unchanged as the U.S. moves toward tighter monetary policy,” Jie added.
The Fed meeting “did not have much of an impact on gold as the continuing tapering of quantitative easing was partially offset by the Fed’s not-so-optimistic stance on labor markets,” Abhishek Chinchalkar, an analyst at Mumbai-based AnandRathi Commodities Ltd., commented in a report today, as quoted by Bloomberg. “The focus will now shift towards the headline U.S. monthly payrolls data. Data emerging in the past few weeks have been encouraging.”
The US Department of Labor will release its weekly unemployment claims report today at 13:30 BST, while the country’s Bureau of Labor Statistics will publish its monthly non-farm employment change at the same time tomorrow.
In addition to US data, market participants are also eyeing armed conflicts in Ukraine and the Middle East. Yesterday, Israeli shelling killed at least 15 Palestinians sheltering in a UN-run school and another 17 near a street market.
