Gold finds strength in signs of global easing

After rising 4.64% in August, the U.S. Comex gold futures rose a further 1.06% in September to close at $1,703.2 on Sept. 6. Month-to-date, the S&P 500 returned 1.81%, the Euro 50 Index surged 3.45% and the EUR/USD rose 0.41%. The Dollar Index fell 0.11% in September after falling 1.73% in August.

The world has high hopes of further global stimulus as recent economic data from the U.S., Eurozone and China all show a weakening trend. The high unemployment rate in the U.S. and uncertainty in the Euro-crisis have impacted spending and investment plans elsewhere. The U.S. August ISM index dropped 0.2 point to 49.6 with new orders and employment index also dropping. The Euro-area PMI was revised down in August while the Chinese August HSBC PMI fell to a three-year low, raising doubt of the government's 2012 growth target of 7.5%.

External markets rallied big on Sept. 6 when the ECB Governor Draghi unveiled the details of his much-anticipated bond purchasing program, although the measures were leaked the day before. The ECB will buy unlimited amount of short-dated bonds with maturities up to three years while "sterilizing" the bond purchase to keep the money supply neutral. The ten-year bond rates of Italy, Spain and Portugal rallied 25 to 39 bp upon the announcement. The ECB action will buy some time for the big borrowers in Europe such as Italy and Spain to prevent their borrowing costs from blowing through the roof. While in the short-term borrowing costs may be lowered, the underlying competitiveness issues of the Eurozone are still not addressed.

Traders have positioned themselves for a good month in gold in September. According to Bloomberg, gold open futures contracts jumped to a three-month high as of Aug. 31 while the gold-backed ETPs holdings surged to an all-time high of 2,471.97 metric tons as of Sept. 6. Festival demand in India and expectations of ECB measures also caused the gold bar price in India to touch an all-time high of rupee 32,300 per 10 grams on Sept. 6.

In the coming days, market likely will focus on the U.S. non-farm payroll data on Sept. 7, Chinese industrial production data on Sept. 9, the German constitutional court ruling on ESM on Sept. 12, the U.S. FOMC monetary policy announcements on Sept. 13 and the Eurozone's decision on Spanish debt purchase on Sept. 15.

About the Author
Austin Kiddle

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

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