By: Ibraaz Syed and Callie Koelbel
GOLD:
Gold
- Electronic (COMEX) Jun 2013
CNS:
GCM3
(http://www.marketwatch.com/investing/future/gold)
Gold prices recently
rallied after its biggest dip in thirty years. Gold futures for June rose to
$1453.60 an ounce on the Comex division of the New York Mercantile Exchange
last week, a 4.2% jump. This was the biggest gain since January of last year
(2012).They rose again this Monday by $13.80 to $1467.40, a 1% gain. This was
the biggest rally in 15 months.
It was
driven by several factors:
- The huge decline in prices has driven
up demand for physical gold.
- Led to increasing demand for coins
and jewelry around the world.
- Banks around the world purchasing
gold. Demand from central banks.
- Weak economic data and FED, ECB
monetary policy decisions.
- Weaker dollar.
The World
Gold Council estimates that central banks will buy up to 550 tons of gold this
year, following an increase in gold holdings of 534.6 tons in 2012. Russia and
Kazakhstan increased reserves for the sixth consecutive month (IMF data).
Countries like India, China, and Thailand are also showing lots of interest in
gold. Goldman Sachs recently closed its bear recommendation on gold.
Expected
decisions on monetary policy have also had an effect on the price of gold. The
European Central Bank will meet Thursday and it is expected to decide on the
side of easy-money policies. The U.S. Federal Reserve met this Tuesday and
Wednesday and decided to continue their program of quantitative easing, in response
to recent weak economic data. Expansionary monetary policy leads currencies
toward inflation, and gold has historically acted as a safe haven against
inflation.
U.S. Dollar
Index (DXY)
NYE: DXY
(http://www.marketwatch.com/investing/index/dxy)
The ICE
dollar index, a measure of the dollar against a basket of six major international
currencies – fell from 82.484 late Friday to 82.141 on Monday – and has
continued its fall. The dollar has been falling since last week and this can
increase the prices of commodities by making them cheaper for anyone holding
foreign currencies. This can have an effect on gold prices rising.
GDP:
Gross
Domestic Product growth of only 0.4% for the fourth quarter of 2012 was
attributed to fears of the “fiscal cliff,” and GDP was expected to swing in the
other direction and grow by 3% or more for the first quarter of 2013. According to the BEA, first-quarter GDP grew
by 2.5%, falling half a percentage short of expectations.
Consumption
and inventory accrual were the main drivers of growth. Disposable income fell
by 4.4% - which is attributed to January 2013 tax increases, and increased
year-end bonuses and higher dividend payments at the end of 2012 to preempt the
2013 tax hikes. The magnitude of the increase in consumption spending hasn’t
been seen since the end of 2010.
A decrease
in government spending is the major reason behind stalled GDP growth. This is
largely due to the “sequester.” There were small decreases in state and local
spending, but the largest cuts were in federal government spending,
particularly in defense.
Looking
towards the future, it is suspected that the inflated 2012 bonuses and
dividends led to the increase in consumption, the effect of which has probably
worn out. Also, due to the continued importation of Chinese goods and lessening
European demand for American merchandise, net exports will probably continue to
fall as well. Since real disposable income is falling – which means decreased
future consumption - and tax hikes and spending cuts due to the “sequester” are
taking their toll, GDP is expected to fall in the second quarter to around 1.5%-2%
or even less.
Quantitative Easing:
The weaker
than expected economic data has led the Fed to decide to continue its program
of quantitative easing, in an effort to stimulate the economy and hasten
recovery. This has had the effect of helping the housing market recover,
although the growth in price level is slowing, which could point to eventual
deflation despite all the monetary stimulus. The Fed has been spending $85
billion monthly on Treasuries and mortgage-backed securities ($40 billion), and
will probably continue to do so even into 2014.
It should be
noted that the Fed’s expansionary monetary policies over the last four years
have helped the stock market due to increased investment in riskier assets in
lieu of the dollar and dollar equivalents. This is one of the reasons behind
the recent all-time stock market highs we’ve been experiencing.
S&P 500 Record High
S&P
500 on Monday 4/29/13:
The
S&P 500 closed at a record high of 1,594 points on Monday, beating the
recent April 11 record high. The technology and material sectors were a major
part of the rise; specifically, information technology stocks had the highest
increases of the ten industry groups in the index. 69% of companies in the
S&P 500 topped expectations of their first quarter earnings, beating the
long term average of 62%. Moody’s and McGraw-Hill, the owner of Standard &
Poor’s, stocks rose after it was released that lawsuits dating back to the
financial crisis accusing them of covering up risky investments had been
settled. McGraw-Hill increased 3% and Moody’s rose 8%, the largest gain in the
S&P 500.
Positive
economic reports encouraged investors and likely contributed to the high. Last
month, wages and spending in the U.S. rose and pending contracts to buy homes
were at the highest levels in 3 years, according to the National Association of
Realtors. The Fed’s “easy money” policy and a lack of investment alternatives
(bond yields at historic lows and a major correction to commodity prices in
recent weeks) drove the stock price gains.
Personal consumption expenditures came in lower than expected, with
March growth only reaching .2%, down from .7% in February.
However,
this does not mean that the U.S. economy is out of the woods yet. Deflation is
a major problem, since it is a clear sign that although asset prices are
increasing, the economy is not really picking up. Also, price growth is slowing
despite extremely high levels of monetary stimulus. Monday’s record high for
the S&P 500 was a prime example of investors reacting strongly to positive
news, but data shows that one shouldn’t place too much emphasis on what is
really just expectations – not reality.
UK
The
United Kingdom economy just barely avoided entering an unprecedented triple-dip
recession when their first quarter results came out. Their GDP grew by .3% in
the first quarter of 2013, after shrinking by .3% in the last quarter of 2012.
The services sector played a key part in the growth, expanding by .6% during
the quarter.
British
Chancellor George Osborne, who has been under pressure lately to ease his
austerity program, hailed the growth as evidence that Britain’s economy is
recovering. However, analysts caution that the economy is still weak, and that
this does not signify the beginnings of a prolonged period of recovery. Unlike
countries such as the U.S. and Germany, the U.K.’s economy has yet to reach the
level it was at before the financial crisis. GDP has been essentially
flatlining over the last 18 months, and output remains 2.6% below the economy’s
pre-crisis peak in 2008. Households are still facing declining real income and
bank lending is also falling, both of which hinder the economy’s recovery.
These positive results came just in time, as official from the International
Monetary Fund will be arriving in London next week to conduct their annual
review of the economy and the Coalition’s policies, over which there are
expected to be tense negotiations.
Twitter Hack Investigation
Last
week we learned about the Twitter hack that caused a market loss of $136
billion and dropped the Dow Jones Industrial Average 150 points before
rebounding. In response, the Securities and Exchange Commission, the Commodity
Futures Trading Commission, and the Federal Bureau of Investigation are
launching investigations into the attack.
Tuesday’s
CFTC technology meeting featured a panel discussion on the market issues
following the hoax. Specifically, the SEC and CFTC will be focusing on high
frequency trading algorithms and discussing what measures can be put in place
to prevent something like this happening again. The commissioner of the CFTC,
Bart Chilton, observed that the technology of high frequency traders lacks a
“kill switch” that would prevent them acting on misinformation. As such,
according to Chilton, “we need to set up basic rules of the road. We should not
just accept technology blindly.”
The
CFTC is also investigating 28 futures contracts that were traded in the
five-minute period and are believed to have been the work of high frequency
traders. Chilton, stated, “We’re looking at who was trading right before and right after that. This is a
full-fledged effort to look at this period of time to make sure that nothing
nefarious in markets took place.” Markets are evolving so fast
that it’s hard for legislation and regulation to keep up. Dodd-Frank, the
financial reform bill of 2010, includes nothing about high-speed trading or
technology – and just three years later, those have become major issues in the
financial market. For its part, Twitter is said
to be testing a two-step verification process that will limit the ability of
hackers to gain access to accounts. In Tuesday’s meeting, CFTC Chairman Gary
Gensler urged renewed efforts to come out in the next month or so with a
concept release, the first step towards possible rulemaking, on high frequency
trading and other market structure issues.
Sources:
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