Gold investors await Europe's bazooka implementation

After trading above $1,600 for six days, U.S. gold futures fell below $1,600 on Wednesday after no new quantitative easing was announcemented by the U.S. Fed. The price dropped to $1,588.60 on Thursday, as the ECB president did not state any concrete plans in buying sovereign bonds. The Stoxx 50 fell 3% on Thursday, the largest single-day fall since mid-March. Week-to-date, the S&P 500 fell 1.5%, the EUR/USD dropped 1.1%, and the CRB Commodity Index fell 1.7%. The Dollar assets performed better, with the 10-year U.S. Treasury bond rallying 7bp this week, and the Dollar Index rising 0.78%.

Gold investors were not unprepared for the inaction of the Fed given a majority of the economists surveyed by Bloomberg expected no actions. U.S. growth, while slowing, has not collapsed. Real GDP growth slipped from 2% in Q1 to 1.5% in Q2. Consumer confidence continued its decline to the lowest level in seven months, while the unemployment rate is still stuck at 8.2%. Bernanke did raise his worry about the U.S. economy's deceleration, and would continue to closely monitor the economic situation. However, future policy actions will hinge on whether Europe's outlook will deteriorate significantly further, and whether the Congress will take concrete actions to prevent the fiscal cliff from happening. UBS, in anticipation of the Fed's action in the 12-13 September FOMC meeting, raised its one-month gold price forecast to $1,700.

Gold traders, who were looking for a quick fix, were clearly disappointed when the ECB president did not follow up with any concrete steps after pronouncing last week that he would do everything to save the euro, suggesting the ECB would purchase government bonds along with the European rescue fund. In the next few weeks and months, gold prices will be affected by how well the ECB will carry out these measures, and whether a closer fiscal integration and a banking union can be fostered.

India, the world's largest gold consumer in 2011, has been experiencing reduced monsoon rains: rainfall was about 19% lower than average from 1 June to 1 August. This would reduce rural incomes, which could impact gold and silver sales during the festive seasons from August to November.

On the other hand, positive fundamentals are supporting gold prices. Bloomberg reported that gold mining production has declined 2.9% this year, owing to operating difficulties and falling grades. The Central Bank of Korea added gold for the third consecutive month. The gold-backed ETP holdings remain resilient, and are up 1.2% this year.

The market will focus on the U.S. payroll numbers on 3 August, the Fed's speech on 7 August, and China's July industrial production data on 9 August.

About the Author
Austin Kiddle

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

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