Can fear refuel gold’s investment demand?

After falling 0.7% last week, the U.S. gold futures inched up $3.6 this week to end at $1,610.7 on Tuesday. The S&P rose 0.74%, oil rebounded 2.48%, while the Stoxx 50 climbed 2.85% this week, after surging 3.1% last week. Since 2 August, the Dollar Index has fallen 1.38%, while the U.S. 10-year government bond yield has climbed 15bp.

Though Italy's real GDP declined 0.7% in Q2 this year, and the German factory orders plunged 1.7% in June, compared to +0.7% in May, European stocks surged, and the Spanish 10-year government bond yield rallied to 6.86% on Tuesday, compared to a recent peak of 7.62% on July 24. The market expects the ECB to start government bonds purchase in the near future, and an unsterilized bond purchase could resemble the Fed's quantitative easing program. Global easing expectations have boosted global stocks and gold prices. As of 31 July, net gold positions have jumped 35% to 96,200 contracts according to CFTC.

Nevertheless, the dollar strength and the lack of a surge in investor demand for gold have prevented the gold price from going higher. The Bombay Bullion Association predicts the Indian import demand would likely be 450 tonnes by September this year compared to 753 tonnes in September 2011. The recent Reuters quarterly poll showed the experts expected the median gold price forecast to reach $1,685 this year, lower than the $1,750 level surveyed as of the end of Q1. By the end of 2013, the gold price could reach $1,791.25.

Barclay's analyst Suki Cooper pointed out that changes in the demand dynamics of gold in the past 10 years have driven up prices: Investment demand, now comprising of over 50% of gold demand, has surged, central banks have turned from net sellers of gold to net buyers, and the producers have stopped hedging gold. Going forward, while the strength of the above three factors may be softened, the European debt and the U.S. fiscal crises will continue to bring on volatility and risk-aversions, which are likely to prompt investors to seek gold for diversifications.

This Thursday's data on Chinese July industrial production and fixed asset investment growth, and this Friday's data on Chinese July exports and imports growth will give a hint whether the economy has stabilized or not.

About the Author
Austin Kiddle

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

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