Gold ETFs recorded their largest monthly fall since May 2012 as political uncertainty buoyed the U.S. dollar.
Political uncertainty remains the key risk for the global recovery. The surge in gold following the Italian election results is evidence that investor sentiment remains fragile. However gold reversed course on the back of USD strength and the upbeat US economic data. The US economic rebound remains in place after a report showed the US economy reversed an initial contraction in Q4 2012, expanding by 0.1% yoy.
Strengthening US manufacturing activity in February and a recovering housing market placed additional pressure on the gold price. Investors are likely to find increasing value in gold as a hedge against downside scenarios given that its price is now 17% below its September 2011 peak (in US Dollar terms).
Fed Chairman Bernanke in his testimony to Congress reaffirmed the central banks’ intention to maintain monetary stimulus as long as the unemployment rate remains above 6.5%. Familiar currency-debasement hedges, like precious metals should remain appealing for investors as five major central banks meet this week, likely signalling intentions for any additional stimulus. Political maneuvering will dominate headlines and be a key catalyst for commodity price direction as Italian election and US budget negotiations drag on. The failure to avert the automatic spending cuts that took place last Friday in the US is a cogent reminder that policy paralysis could stop the global recovery in its tracks.