Gold buyers cheer as the dollar falls

The U.S. Comex gold futures rebounded 1.33% in the past two days to $1,415.80 on Thursday while the Dollar Index plunged 1.49% to finish at 81.537 on Thursday. The Japanese Yen rallied about 3% against the U.S. Dollar just in the past two days. The stock markets remain volatile with the S&P 500 index dropping 0.5% and the Euro Stoxx 50 index falling 3.37% this week. The VIX, or the fear index, has risen from 12.5% in mid-May to a recent high of 17.5% on June 5.

ECB Actions and the U.S. Dollar

On Thursday, the ECB decided to leave the interest rates unchanged at 0.5% and would not take any immediate actions such as negative deposit rates or cash lending to institutions to further boost the economy. The U.S. stock investors were initially disappointed that no further stimulus measures are taken despite big promises from the ECB governor and an expected 0.6% contraction in the Euro Area this year. The Outright Monetary Transactions program is yet to start. In the U.S., the May ADP employment increased 135,000 versus an expected 165,000. The Dollar weakened further against the Euro. For Friday's employment report, Bloomberg shows an expected change in non-farm payrolls of 163,000 and a projected unemployment rate of 7.5%.

Gold Fund Flows

As stock prices wobble and the U.S. dollar falls, the number of gold traders who are expecting a jump in the gold price next week rises to the highest since mid-March according to Bloomberg. Nevertheless, the investors in paper gold continue to sell. Year-to-date, investors have sold 495 metric tons of gold-backed ETPs. EurekaHedge reported that 20 gold hedge funds have closed doors so far this year. However in China, the gold price premiums to international prices jumped from an average of $7 in the year ending mid-April to an average of $31 after April when the gold prices plunged.

What to Watch

Apart from watching the U.S. nonfarm payrolls report on Friday, we will also monitor China's May industrial production and inflation data on June 9, Japan's BOJ Target Rate on June 11, The April E-17 industrial production on June 12, the May U.S. retail sales on June 13 and the May U.S. industrial production on June 14.

About the Author
Austin Kiddle

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

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