Gold sees risks in ETP outflows

The U.S. Comex gold futures surged 1.51% last Friday, fell back 0.22% on Monday and jumped 0.9% on Tuesday, ending at $1,586.70. The gauge reached $1,590.1 on April 9. The gold futures have fallen in the past two consecutive weeks by 1.88%. The S&P 500 Index and the Euro Stoxx 50 Index rebounded by about 1% and 0.40% respectively this week after the sell-off last week. As of Tuesday New York close, the Dollar Index has fallen 0.23% after falling 0.58% in the previous week. The biggest story in the currency market has been the yen, which dropped 3.43% last week and 1.46% this week against the U.S. Dollar.

Digesting the Bank of Japan Action and Other Economic Data

Although the Bank of Japan recently announced an aggressive monetary policy including an increase of the JGB purchases from 4 trillion to over 7 trillion yen per month, a rise in the maturities of the bond purchases and a determination to ease until inflation reaches 2% per year. Gold prices failed to increase upon the BOJ news at first. However, when the U.S. March non-farm payrolls came in at 88,000 instead of 190,000 last Friday, the Japanese yen fell close to 100, and the March Chinese inflation data was lower than expected at 2.1%, gold price started to react. Also, U.S. Fed Chairman Ben Bernanke mentioned in his recent speech that he saw a room for improvement in the U.S. economy. Gold price jumped in expectation of more stimulus measures by the Central Banks and the much bigger amount of Japanese liquidity. Gold priced in yen reached a 33-year on April 8 and rose about 8% this year.

Gold Investors' Positioning

Barclays recently reiterate that the biggest short-term risk for gold prices will be gold-backed ETP outflows. Close to 18 tonnes of outflow occurred in the first week of April, after a record net outflow of 50 tonnes in February. Barclays also reported that fund managers raised their gross shorts by 14,500 lots, but raised their gross long by only 2,200 lots. Total gross long positions remain around 200,000 lots since last August before the QE3 announcement.

What We Are Watching

Gold investors will scrutinize the U.S. March FOMC meeting minutes to be released on April 10. On April 12, we will also look for any announcements from the Eurogroup meeting and the EU17 February industrial production data. The Indian restocking to take advantage of the weaker gold prices in Rupee ahead of the Akshaya Tritiya festival is also worth monitoring.

About the Author
Austin Kiddle

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

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