247Bull.com Editor: The market continues to focus on the “improving” US employment picture. However, as BCA Research noted in a recent report, despite the fact that unemployment in the US has fallen from 10% at the 2009 peak to 7.5% as of April, the employment-to-population ratio for adults age 25 to 54 is still 4.5 percentage points less than its pre-recession average. Furthermore, these participation levels have shown little improvement since the end of the recession. All of this adds to the evidence that the US economy is far from healthy and will therefore need artificial support well beyond 2013.
Spot gold fell to three week lows below $1370 an ounce Tuesday, as stocks and commodities also fell amid ongoing speculation over when the US Federal Reserve might begin reducing the size of its quantitative easing program.
“Gold remains bearish while trading below the $1424 current June high,” reckons Commerzbank senior technical analyst Axel Rudolph.
Gold exchange traded funds tracked by Bloomberg saw their gold bullion holdings fall by 6.1 tonnes yesterday, although the world’s largest gold E.T.F. SPDR Gold Trust (ticker GLD) added metal for only the sixth day this year, raising its holdings by 2.7 tonnes to 1009.8 tonnes.
Silver meantime dropped back below $21.60 an ounce, falling towards three-week lo0ws touched yesterday.
Major European stock markets were down nearly 1.5% by Tuesday, after losses in Asia that followed the Bank of Japan’s decision to leave its QE program unchanged.
“Upbeat sentiment over the US economic outlook continues to feed concerns of increasing US yields and an easing pace to [quantitative easing],” says VTB Capital analyst Andrey Kryuchenkov.
“Volumes in Asia will be subdued due to holidays in China,” he adds, referring to tomorrow’s Dragon Boat Festival.
Ratings agency Standard & Poor’s raised its outlook for its AA+ US credit rating from ‘negative’ to ‘stable’ Monday.
“We do not see material risks to our favorable view of the flexibility and efficacy of US monetary policy,” said a statement from S&P.
A stable outlook implies the chance of a downgrade in the rating is less than one-in-three.
“The last time the rating agency moved to downgrade US credit in August of 2011, the markets were sent into a tizzy with equities plunging and gold soaring to a record high of $1920 an ounce a month later,” says a note from Ed Meir, metals analyst at brokerage INTL FCStone.
“However, this time around, the move by S&P did not cause much of a stir, as investors seemed to be more focused on erratic growth patterns evident across most industrialized economies, coupled with growing uncertainties with respect to what the Federal Reserve is going to do with regard to its stimulus program.”
So-called ‘Fed tapering’ – the potential reduction in the size of the Fed’s asset purchase from the current $85 billion a month – “is a big issue” former World Bank president Robert Zoellick said Tuesday.
“The question,” said Zoellick, “will be, as the Fed eventually moves away from the monetary easing policies, what will be the effect of [withdrawing]the wall of money that’s moved around the world?”
“[US] Labor market conditions have improved since last summer, suggesting the [Federal Open Market] Committee could slow the pace of purchases,” James Bullard, president of Federal Reserve Bank of St Louis, which is not an FOMC member this year, said Monday.
“But surprisingly low inflation readings may mean the Committee can maintain its aggressive program over a longer time frame.”
The Bank of Japan meantime left its main policy interest rate on hold at 0.1% Tuesday, while reiterating its quantitative easing commitment to grow the monetary base by an annual up to 70 trillion Yen ($720 billion).
UK industrial production meantime fell by 0.6% in the year to April, according to official figures published this morning, while manufacturing production, a subset of industrial production, down 0.5% over the same period.
Over in Europe, Germany’s Constitutional Court today began hearing testimony on the European Central Bank’s Outright Monetary Transactions program, by which the ECB has pledged to buy the debt of distressed sovereigns on the secondary market to mitigate borrowing costs.
Bundesbank chief Jens Weidmann, who has publicly criticized OMT, is expected to testify at the hearing, which has been added to an existing case before the Court over whether the European Stability Mechanism rescue fund breaches Germany’s constitution.
Weidmann’s fellow German Joerg Asmussen, who sits on the ECB’s Executive Board, is also expected to appear, as is finance minister Wolfgang Schaeuble.
Ben Traynor | BullionVault