Gold finds central bank support as ETFs dump holdings

The U.S. Comex gold futures rebounded 0.25% to $1,660.80 on Tuesday after falling 1.80% last week. The S&P 500 index has risen 0.32% this week and 5.73% this year. The Euro Stoxx 50 index rose 0.19% this week after rising 1.28% last week. The crude oil futures have increased every week in the past seven weeks, rising 15.5% from the recent low of $84.44 in November last year. The Dollar Index has declined 0.23% this week while the Euro/Dollar has surged to a 14-month high at 1.3492 on Tuesday. The U.S. 10-year government bond yield briefly breached 2% on Monday.

Equities and High Yield Shine Despite Cautious Tone towards the Economy

The executives at the World Economic Forum at Davos last week were cautiously optimistic about the world economy despite the fact that the S&P 500 index is just 3.66% below its 2007 peak of 1,565.15 while the Dow Jones Industrial Average has surged to a five-year high. The December U.S. durable goods order rose 4.6% compared to the expectation of 2%. Corporate earnings in the U.S. have continued to beat expectations. The 10-year Spanish government bond yield has dropped 250 bp since the peak reached in July 2012. Global junk bond yields have continued to decline. On the other hand, the consumer confidence in the U.S. declined more than expected in January to 58.6 from 66.7 in December, reflecting the impact of the higher payroll taxes. The economies of Japan, Europe and the U.K are still shrinking. Policy makers' caution towards the economy suggests that the stimulus measures are unlikely to be taken away anytime soon, which will support gold prices.

Central Bank Keeps Buying Gold While Investors Sell ETFs

Bloomberg reported that the gold-backed ETP holdings fell 22 metric tons from the Dec. 20 peak to 2,610.272 metric tons on Jan. 27. As the economy recovers, investors' appetite for gold may have decreased. On the other hand, according to GFMS, the world central banks bought 536 metric tons of gold in 2012, the largest increase since 1964. The IMF reported that Russia's gold reserves rose 2.1% in December and 8.7% in 2012. Kazakhstan's gold reserves jumped 1.7% in December and a whopping 41% in 2012. Turkey's gold holdings rose 84% as domestic banks deposited gold at the central banks. Given that the sovereign debt crises are still haunting the U.S. and Europe, central banks in emerging countries will continue to add gold on top of the traditional reserve currencies.

About the Author
Austin Kiddle

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

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