Gold demand down 7% from 2011

The U.S. Comex gold futures rebounded by 1% in the past two days, in line with the rise in the external markets. The S&P 500 index rebounded 0.82%, the Stoxx 50 rose 1%, while the CRB Commodities Index went up 0.69%. The Dollar Index fell slightly by 0.15% to 82.357, while the U.S. 10-year Government bond yield surged almost 10bp in the last two days to 1.8346%.

Talks of global central banks easing have been boosting gold's sentiment. Foreign direct investment into China fell 8.7% in July from a year ago, and the level touched a two-year low. Recently, Premier Wen of China suggested the government would reach their economic and social targets this year despite the substantial downward force, leading to market expectations of more monetary easing. In the U.S., while July's building permits rose to a four-year high, the New York manufacturing index actually fell in August, and the U.S. monthly change in the CPI remained at 0% for the second month. The European Q2 GDP's contraction also boosts hopes for more monetary easing.

Although the CFTC data showed hedge funds and traders have reduced their net positions in gold by about 57% since February, as reported by Bloomberg, hedge fund manager John Paulson has actually boosted his holdings of bullions to 44% of his capital as of Q2.

The World Gold Council (WGC) recently reported that gold demand reached 990 tonnes in Q2, down 7% from a year ago. The weaker trend in investment, jewelry and technology demand for gold, was compensated by the Central Banks' surging appetite, which led to the largest quarterly increase since Q2 2009. Though both China's and India's gold consumer demand declined year-on-year in Q2, retail investment demand ex-China and India actually rose 16%. In particular, the European purchase of bullion bars and coins rose 15%, revealing investors' demand for gold for capital preservation in light of the European debt and banking crises. The WGC particularly highlighted Russia will continue to be a driving force in the gold market. It is now the fourth largest consumer of gold jewelries, and has the world's eighth largest gold reserves.

Next week, the market will likely focus on the Fed's July FOMC minutes on 22 August, the "Flash" manufacturing PMIs for China, and the EU on 23 August, and the monthly change in the U.S. July durable goods orders on 24 August.

About the Author
Austin Kiddle

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

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