Gold is under pressure, likely as a result of position squaring ahead of month-end. Nonetheless, the yellow metal appears poised to notch its second higher monthly close of the year.
U.S. Q4 GDP was revised to +2.4% y/y, from a preliminary print of +3.2%. That’s down significantly from the 4.1% annual pace recorded in Q3. Clearly growth risks persist, and yet stocks remain well bid, which may also be negatively impacting gold in the short-term.
The dollar however dropped to a new 8-week low as the market seems to be reconciling that, taper not withstanding, there will indeed be a “Yellen put.” Much of the retreat in the dollar is attributable to today’s sharp rise in the euro.
The euro surged on news that HICP inflation in the EU unexpectedly held steady at 0.8% y/y. This forced an unwind of expectations that further easing by the ECB was imminent. That’s an interesting take, as 0.8% is still way below targeted inflation. Even if you believe deflationary pressures are losing momentum, the trend in HICP inflation remains decidedly negative since peaking around 3% in late-2011.
Euro strength clearly overrode Chinese yuan weakness against the greenback. Once again, the yuan dropped precipitously against the dollar with traders reporting that the PBoC was intervening through state-owned-banks. Efforts by the central bank to weaken the yuan is the latest escalation in the currency wars.
The desire of major industrial nations to grow exports through weaker currencies has resulted in beggar-thy-neighbor competitive currency devaluations. This has historically been accomplished via über-accommodative monetary policies and direct interventions.
The escalation of these currency wars has been a driving force in gold’s long-term uptrend. The latest shots fired by China suggest that broad-based currency debasement is likely to continue for some time to come.