Gold waiting on easing as traders take to sidelines

This week, gold prices have been moving up in tandem with risky assets and commodities. The U.S. Comex gold futures climbed 0.68%, the S&P rose 0.85%, the Stoxx 50 surged 2.7%, and the CRB Commodities Index climbed 1.37%. The EUR/USD retreated 0.65%, while the U.S. 10-year government bond yield rose 12.5bp, as capital flowed to the risky assets.

Stimulus expectations from global central banks have underpinned gold price at a level above $1,600. Several pieces of economic data have been supporting gold sentiment this week. First, Chinese July CPI rose 1.8% year-on-year, the lowest increase since January 2010. Industrial production slowed from 9.5% in June to 9.2% in July, led by slower growth in heavy industrial production, while retail sales also slowed from 13.7% in June to 13.1% in July. Exports in July rose only 1% from a year ago, while imports rose 4.7%, showing not only weak external demand, but also a marked deceleration of investment in China. Given the pledge by the Central Government to support growth in 2H 2012, the markets expect more monetary easing in the form of RRR cuts, and higher bank lending to fund infrastructure projects, which would support gold price. The U.S. weekly jobless claims as of August 4 fell unexpectedly by 6,000 to 361,000 compared to a Bloomberg survey of 370,000, following an increase of payroll of 163,000 in July. The positive reactions of commodities to the U.S. data have spilled over to gold.

While investors’ demand for gold-backed exchange-traded products remains resilient, rising by $850 million to reach 2,411.7 metric tons in August, some doubt the ability for the SPDR Gold Trust to replicate the 500 tonnes increase in demand between the times when Lehman collapsed in 2008 until the end of 2011. While speculative gold demand has increased, net long gold positions reported by the CFTC are not too far from the trough in 2008. Recently, Comex gold volume traded at fewer than 70,000 lots, approaching a 2012 low. Gold traders are on the sideline until the Fed or the ECB takes real measures of quantitative easing.

Some upcoming important data to watch include Chinese July new loans growth and M2 growth on 11 August, France and Germany's preliminary Q2 GDP on 14 August, and the U.S. weekly initial jobless claims and July housing starts on 16 August.

About the Author
Austin Kiddle

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

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