Gold firmed to another two-week high, amid heightened risk aversion, driven by the World Bank’s downgrade of global growth prospects for 2014. Dollar strength continues to limit the upside.
The World Bank cut its global growth expectations for this year to 2.8%, from 3.2% previously. They expect the European economy to grow by an anemic 1.1%, but even that may be too optimistic. Their U.S. forecast was pared to 2.1%, from 2.8%. They also expect China to slow gradually over the next several years.
Global stocks reacted negatively to the news, and bonds were boosted by safe-haven demand. Interest-rate differentials continue to favor Treasuries, with the 10-year note/Germany 10-Year spread near an eight-year high 123 bps. The spread between the 10-year note and 10-year JGBs is 202 bps. Heck, as messed up as France is, their yield is 87 bps lower than the U.S.; and Spain is only 2 bps higher.
It strikes me that risk is pretty grossly mispriced at this point, but flows in the FX market follow yield; and right now, U.S. yields look pretty attractive — in a best looking horse at the glue factory kind of way. That is supporting the greenback, which in turn is limiting upside potential in the gold market for the time being.
However, despite assertions to the contrary from the financial press, physical gold demand remains pretty robust. Koos Jansen of In Gold We Trust says Chinese gold demand has been 823 metric tonnes so far this year, and the weekly average withdrawals from the Shanghai Gold Exchange puts China on pace for 1908 tonnes by year-end.
There is an ongoing debate as to what actual Chinese and global gold demand actually were last year, so that figure is either a sizable increase over the 1,176.40 tonnes figure proffered by the China Gold Association, or a modest contraction from Koos Jansen’s number of 2197 metric tonnes. Regardless, it’s reflective of ongoing strong demand.
ETF Securities (as reported by Shanghai Metals Market) believes that the Indian and Chinese central banks alone, are “on track to absorb the equivalent of 90% of all mined gold production this year.” That’s not going to leave much for the rest of us…