Gold nervous about deflation, cheers central bank buying

Gold bars at a central bank Gold bars at a central bank

After falling for the past two weeks, the U.S. Comex gold futures rebounded 0.67% to $1,713 on Thursday after touching a low of $1,698.70 on Wednesday. The S&P 500 Index rose 0.3% on Thursday after falling 1.75% in the previous two days. The Euro Stoxx 50 Index traded down 2.31% this week. The crude oil futures bounced slightly by 0.37% to $86.05 on Thursday. It dropped 4.44% week-to-Thursday. The Dollar Index rose above 80 on Oct. 24 and has risen 0.5% this week.

Gold traders seem frustrated after the gold futures failed to pierce through $1,800 in early October. Also the market appears to be concerned with the "D" word — deflation. The ECB President Draghi said that his bond-buying program will focus on countries whose fiscal paths are sustainable and the program will not create inflation. He was more worried about falling prices in several Euro-area countries than inflation. In Europe, the October Eurozone manufacturing PMI was at 45.3 compared to the expected 46.5. The IMF projects that the Eurozone may contract 0.4% this year. In the U.S. business spending prospect looks grim — non-defense capital goods bookings were unchanged in September compared to a 0.2% rise in August. Slowdown in Europe and Asia and the looming fiscal cliff in the U.S. have hurt business orders.

The Fed will continue with the same QE3 policy announced in September which calmed the gold market yesterday. Also the same low Fed Funds rate will be maintained at least through mid-2015. The bigger event for gold will be the Nov. 6 U.S. election. If Romney wins, the dollar could get a boost and the Fed's easing policy might not continue.

Today, more central bank gold buying news cheered gold. Brazil added 1.7 tons in September while Turkey added 6.8 tons. Brazil last added gold in December 2008. The buying is expected to continue given the lower prices and currency risks in the developed world. The Bloomberg data shows gold-backed ETP holdings reached a record high of 2,585.1 metric tons as of Oct. 24 while big speculators are still bullish on gold.

The important events to watch would be the U.S. Q3 GDP data on Oct. 26, the Bank of Japan Monetary Policy Meeting and the Eurozone October business climate indicator on Oct. 30, the U.S October ISM manufacturing index and China's official October PMI on Nov. 1 and the U.S. non-farm payrolls report on Nov. 2.

About the Author
Austin Kiddle

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

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