Gold maintains insurance role despite seesawing

Since mid-May, the U.S. Comex gold futures prices have seesawed, climbing up one week, and declining the next. After the initial gold price surge of 4.6% from June 28 to July 3, gold futures have dropped $42 to $1,579.8 as of Tuesday. Since July 3, the broader risky markets also had not performed well: The S&P and the Stoxx 50 fell 2.4% and 3.4% respectively, the EUR/USD dropped 2.8%, and the CRB Commodity Index declined 1.4%. In contrast, the Dollar Index surged almost 2%, while the U.S. 10-year Treasury Bond rallied about 13bp.

In June, the U.S. added 80,000 nonfarm payrolls, below the market expectation of 100,000, although unemployment rate remained unchanged at 8.2%. China cut interest rates two times in one month, as moderating inflation, slowing imports, and rising trade surpluses are pointing towards an accelerating rate of slowdown. China's Premier Wen mentioned that investment growth would need to be supported in China, prompting market expectations of further policy stimulus. The ECB governor may also be prepared to lower interest rates again after cutting rates last week. The EUR/USD fell to a two-year low to 1.2250 on Tuesday, as the upcoming European bailout fund will meet delays, even though the 30 billion Euros rescue funds are expected to flow directly to the Spanish banks in July. The macroeconomic uncertainties have prompted investors to demand dollar, preventing gold prices to go higher.

On July 10, the World Gold Council (WGC) pared down its earlier estimate for 2012 Chinese gold demand from 1,000 tons to 870 tons, citing a firmer dollar and the stall in gold price rally have lowered consumers' desires to buy gold. Thomson Reuters GFMs Ltd. expects Chinese demand to top 900 tons in 2012, a yearly rise of 16%. Still China's gold demand continues to be strong, as shown by the May gold imports from Hong Kong into China, which rose six times a year ago to 75.6 metric tons.

In the latest WGC's research titled "Gold as a strategic asset for UK investors," a small gold allocation ranging from 2.6% to 9.5% was shown to increase portfolio performance on a long-term basis, as well as reduce losses during the worst market periods related to the 2008 to 2009 financial crisis and the latest European credit crises, thus supporting gold's role as a portfolio diversifier, hedger, and wealth preserver.

About the Author
Austin Kiddle

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

Comments
comments powered by Disqus