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Summary The FOMC will convene again next week. China has been stocking up on gold in the past few years. Will China’s strong demand for the yellow metal save GLD? The U.S. GDP for Q2 will also be released this week. Will it move the price of GLD? The recent plunge in the price of SPDR Gold Trust (NYSEARCA: GLD ) brought the gold ETF to its lowest level since 2010. The weakness of China’s economy, the expectations of a rate hike by the Federal Reserve, the recovery of the U.S. dollar , and the general bearish sentiment in the commodities markets are keeping gold down. Even the recent news of the high growth in China’s gold accumulation hasn’t stopped the price of GLD from falling. Let’s examine some of these issues with respect to the general direction of GLD. The Fed and GLD The bets around the first rate hike of the Federal Reserve continue. For now, the market still places very low odds on a rate hike in September: the implied probabilities are only 19% — slightly higher than back in late June, albeit this probability is still low; for the October meeting the odds are 36% and for December the odds are 56%. St. Louis Fed President Bullard recently stated that the odds of a rate hike in September are actually better than even. Also, the Fed inadvertently published that staff economists also expect a rate gain this year. In any case, a rate hike, even just 0.25%, will have more of an impact on the market expectations, which could drive further down the price of GLD. In a related story, the San Francisco Fed released a paper , in which the current U.S. inflation does not signal a statistically significant deviation from the inflation target, considering the high monthly volatility in inflation estimates. This paper is optimistic about the progress of U.S. inflation that will eventually rise to the Fed’s target of 2%, even though it wasn’t able to bring inflation to this level over the past three years. This week, the FOMC will convene again. The FOMC isn’t expected to change its policy in the upcoming meeting, but it will show if the FOMC members are turning more dovish and getting ready for liftoff in September. One factor, among several, that could impact members’ decision about the timing of the rate hike is the upcoming GDP report for the second quarter. The current expectations are for the GDP for Q2 to show a growth rate of 2.7% — any negative surprise of lower growth rate could reduce the odds of a rate hike anytime soon and tilt the scales back to the doves in the Fed. China stocking up on gold China has finally revealed the amount of gold it has been stocking up in the past several years. The amount of gold rose from 1,054 tons back in April 2009 to 1,658 tons in June 2015 – 57% increase during the entire period or an average annual gain of around 8%. This puts China as the fifth biggest hoarder of gold among all countries. China also bought gold at a faster pace than any other country. This accumulation rate seems impressive, but a more detailed examination reveals the country has also increased its foreign exchange reserves during that period from a net worth of $2,008 billion to around 3,609 billion as of June 2015 for an 84% growth. But even if we were to consider the net value of gold, which also grew during that period (back in April 2009 gold price was $890 per ounce) then the value of China’s gold reserves from its foreign exchange reserves only inched up from 1.4% to 1.5%. So it remained relatively flat. In other words, the country hasn’t increased its share of gold from total foreign reserves. Moreover, China is already facing too many problems in keeping up the high surplus in its current account to further grow its foreign reserves. China’s economic growth is on shaky ground and so relying on China to drive GLD’s price back up to its former glory days may be questionable at best. Despite the negative sentiment related to the gold market, GLD could surprise and make short-term recoveries, especially if the FOMC were to present a more dovish statement and the U.S. GDP comes in short of market expectations. Even so, it will need a real change in the direction of the U.S. economy for the FOMC not to raise rates this year. Finally, as long as the FOMC considers normalizing its monetary policy in the coming months, GLD’s long-term outlook doesn’t seem positive. For more please see: Gold’s Flash Crash – What Happened to My Precious (Metal)? Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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