Gold advances on central bank buying and margin changes

Gold futures fell for the first three days of this week by $43.50 or 2.7% before rebounding $9.10 to end at $1,557.50 on Thursday. Year-to-date, gold futures are down 0.6%, worse than S&P at +5.9% and Dollar Index at +2.7% but better than Stoxx at -3.8%, Euro/dollar at -3.3% and CRB Commodity Index at -7.7%.

Gold price retreated on Wednesday when European leaders took no new actions after the informal EU Summit. The Germans did not agree with the French on joint debt sales, the leaders did not change anything to relieve Spain and wanted Greece to stay in the Eurozone but stick to its budget cuts commitments. The next summit will happen on 28 June, 11 days after the new Greek election, tantamount to a Euro referendum. Economic news is also weak: European manufacturing PMI fell 0.8 point to 45.9 in April while German IFO index fell 2.5 points to 106.9. Weak China's flash PMI data points to manufacturing contraction for the seventh month. All these fuel dollar strength with the Dollar Index rising 1.3% for the week.

Central banks gold purchase data in April cheered gold market on Thursday, however. Mexico, Kazakhstan and Ukraine added about 204,000 ounces in April. The Philippines added a whopping 1.033 million ounces in March with gold now at 13.6% of its total reserves. UBS highlighted the Philippines' gold purchase is significant as this is the second largest monthly Central Bank's purchase after Mexico's purchase of 2.5 million ounces in March 2011. World Gold Council (WGC) reported that central bank purchases were 80.8 tonnes in Q1 2012 or around 7% of global gold demand. What is more interesting is that WGC is now confident that central banks will continue to buy gold and has added official sector purchases as a new element of gold demand while eliminating official sector sales as a negative supply factor.

Another positive factor for gold is that the CME Group announced effective 29 May, initial performance bond requirements for speculators for gold futures will be cut from $10,125 to $9,113 while the maintenance margin will be cut from $7,500 to $6,750.

Next Friday, market participants will monitor the unemployment rate in April, non-farm payrolls and ISM manufacturing index in May from the U.S. and also May PMI data from China and several European countries for any further signs of economic weakness.

About the Author
Austin Kiddle

Austin Kiddle is a director of the London-based gold broker Sharps Pixley Ltd.

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