Gold boosted by Chinese demand and economic indicators

Gold futures led the performance of other asset classes by rallying 1.4% week-to-date as of Tuesday. The S&P rose only 0.1% after rallying 3.7% last week, while the Stoxx was flat after rising 3.6% last week. The EUR/USD fell 0.1%, and the CRB Commodity Index dropped 0.7% so far this week. The Dollar Index fell 0.1% as well. The 10-year U.S. Treasury bond yield rose slightly by 3bp. In other words, many markets have been adopting a wait-and-see attitude.

China's recently released economic data have been encouraging: Exports growth and trade surplus were higher than expected; inflation eased to 3%; new loans at RMB 793.2 billion were higher than expected, indicating the economy has been responding to policy easing.

While Spain requested and received a bank bailout package of €100 billion over the weekend, the 10-year Spanish government bond yield nevertheless surged 49bp to 6.7% as of Tuesday, while the 10-year Italian government bond yield rose 40bp to 6.17%. The market is speculating that Spain will need a sovereign bailout soon and Italy could follow next.

As European uncertainty prevails, gold price momentum has been further boosted as market expects more policy stimulus from major central banks. Gold traders are cheering the news that ICBC, the largest bullion bank in China, is expecting a 10% rise in investment demand in China, and Chinese economic growth has not collapsed as much as expected. Moreover, physically-backed ETPs holdings are still up year-to-date by 26 tonnes, private investors are increasingly demanding gold bars and coins, and central banks continue to invest in gold, reflecting the diversified sources of long-term gold demand. On the other hand, Barclays pointed out that the overall positioning in gold, as reported by the Commodity Futures Trading Commission as of June 5, remains relatively light at only 30% of open interest.

While gold prices will no doubt be volatile as a result of the upcoming Greek re-election results and the market speculations of further quantitative easing, long-term investors are still taking advantage of dips in gold prices to further diversify into gold in lieu of depreciating paper currencies.

About the Author
Austin Kiddle

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

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