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Global Macro: Strong Manufacturing Data Hurt Gold

NEW YORK ( TheStreet) -- Global manufacturing data released on Monday outperformed expectations. sparking a selloff in Treasury bonds and German bunds and leading to a drop in gold prices and the stocks of gold-mining companies.

The positive data show that business investment may be growing faster than previously thought, as the U.S. manufacturing number was its highest since 2011. If both consumers and corporations regain confidence and increase spending, then tapering by the Federal Reserve may come sooner than expected.

That is not to say that December will be the target date for Fed tapering, but investors may now expect the Fed to reduce its bond buying a few months earlier than previously thought, resulting in the selloff in assets sensitive to interest rates.
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Higher interest rates keep inflation suppressed, which creates less demand for assets that hedge inflation such as gold and other precious metals. We are seeing a repeat of what happened in May when whispers of tapering began to spread.

The chart below is of iShares Barclays 1-3 Year Treasury Bond (SHY) over iShares Barclays 20+ Year Treasury Bond (TLT). The pair measures the U.S. yield curve and moves higher when the yield curve steepens.
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The pair also trades inversely to gold and other precious metals. Higher long-term rates steepen the curve. The trend of positive economic data over the past month caused a steepening in the curve; the pair spiked on Monday, although it has yet to recapture its August highs.

The positive data pose a conflict for investors. They are hesitant to let data sway them too much as stimulus looks to remain intact at least into 2014. Meanwhile, long-term expectations continue to price in the Fed cutting stimulus sooner as economic trends continue to improve.
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Expect rate-sensitive assets to trade in a range, at least until the Fed presents a more definitive outlook at its meeting this month.

At the time of publication, the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Andrew Sachais' focus is on analyzing markets with global macro-based strategies. He takes into consideration global equity, commodity, currency and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

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