Will gold be derailed by better U.S. and European news?

After touching a recent high of $1,755 on Nov. 23, the U.S. Comex gold futures retreated about 0.7% to end at $1,742.30 on Tuesday. Year-to-date, the gold futures are up 11.20%, compared to the S&P 500 Index which is up 13.51%, the Commodities CRY Index which is down 2.47% and the Dollar Index which is up 0.28%. The S&P 500 index fell 0.72% while the Euro Stoxx 50 Index declined 0.53% this week.

Finally, a Deal for Greece
Gold prices and the EUR/USD got a boost on Nov. 23 as the market anticipated a Greek deal. On Nov. 26, the Euro-area finance ministers and the IMF agreed to reduce interest rates on Greece's debt, permit an interest rate suspension for 10 years on the temporary rescue fund and lend money to Greece to buy back bonds, avoiding a debt cut for now. The ECB will also transfer its profits from its Greek bond purchases into the fund. These measures are expected to cut Greece's current 170% debt-to-GDP down to 124% in 2020. As investors began to question the details of the measures, both the gold price and the Euro/Dollar softened. Greece has to adhere to a fiscal austerity program which includes a yearly budget surplus of 4% of GDP. Besides, the Eurozone debt crisis is by no means resolved.

Fiscal Cliff Concern Despite Better Economic News
The U.S. Conference Board's consumer confidence index surged to a four-year high to 73.7 in November compared to a median estimate of 73. Retail spending in the four days since Thanksgiving rose about 13% from a year ago. Property values in the 20 U.S. cities rose 3% year-on-year in September, the fourth month of yearly rise. Despite the better economic news, the U.S. Senate Majority Leader remarked that progress on the congressional budget debate has been disappointing, causing stocks to sell-off.

Demand for Gold Rises Again
The net non-commercial combined positions in gold rose 3.76% to 202,327 contracts in the week to Nov. 20 according to Bloomberg. Gold demand has recovered in India in Q3 compared to a dismal first half. In fact, Indian demand for gold was at 612 tons in the first nine months, beating China's 605 tons according to the World Gold Council (WGC). Gold bar price in India reached a record high of Rupee 32,950 per 10 grams on Monday as demand for gold increases during the wedding season and the Rupee continues to weaken. Gold-backed ETPs reached another record on Nov. 26 at 2,606.974 metric tons. According to the WGC, the biggest threat to gold price outlook would be a change in the current negative economic world view. However, economic improvement in the West and Japan still looks a long way away.

About the Author
Austin Kiddle

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

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