Gold climbs higher to 1253.4 in European session after soaring +0.90% yesterday. Among the various reasons triggering the metal’s rally after several days of consolidation last week, we believe slump in bond yields and FOMC minutes were the most prominent ones. While we are bullish for gold in the long-term, its performance in non-USD terms has not been as outstanding as in USD-terms. This suggests this round’s rally is not as broadly-based as the one earlier this year.

US 10-year government bonds rose, pushing yields to 2.47%, the lowest level since January 2009, at close. Gold usually moves higher when yields drift lower. In August, bond yields tumbled -15% as ambiguity in macroeconomic outlook drove investors away from equities to Treasuries. Investors usually feel uneasy with uncertainty and lengthening of such en environment should boost gold’s safe-haven demand further.

At the August FOMC minutes, Fed staff economists viewed that the pace of the economic recovery slowed in recent months and that inflation remained subdued. Moreover, economic data showed that ‘the recent recession was deeper than previously thought’. Yet, the Fed indicated that a move to additional QE is not guaranteed.

Chairman Bernanke said that the Fed will ‘consider steps it could take to provide additional policy stimulus if the outlook were to weaken appreciably further’. However, some members remained hesitant to take further steps on QE. Concerning the decision to reinvest principal repayments received on MBS or maturing agency debt, ‘a few members worried that reinvesting principal from agency debt and MBS in Treasury securities could send an inappropriate signal to investors about the Committee's readiness to resume large-scale asset purchases’. The decision was made mainly to maintain the size of the Fed’s balance sheet unchanged, rather than to stimulate growth.

The minutes indicated that policymakers would prefer taking actions (implement unconventional measures) after something happened (economic outlook deteriorated further/risk of a double-dip recession heightened) to doing something to prevent the situation from happening. We believe the minutes should have disappointed investors as it failed to give the market a clearer outlook. This is evident by the rally in bond and gold prices after the release.

After yesterday’s declines, oil and base metal prices recovered after China’s PMI rose in August, signaling slowdown in the country’ growth is limited. Focus has turned to the US’ ISM manufacturing index which probably slipped to 53 in August from 55.5 a month ago. A weaker-than-expected Chicago may lead to downside surprises in the ISM data.