Can physical demand turn around weak gold sentiment?

After plunging 6.89% last week, the gold futures have dropped 1.31% in the past two days to finish at $1,275.10 on Tuesday. The prices fell to as low as $1,242.60 during Wednesday Asian morning. The Dollar Index continued to strengthen, rising 0.32% this week to 82.581 after surging 2% last week. The S&P 500 index and the Euro Stoxx 50 index retreated 0.28% and 0.24% respectively in the past two days. Both indexes traded up more than 1% on Tuesday.

Stronger U.S. Data and Calmer Tone from China

The world equity and bond markets have turned upside down after the Fed's tapering talk last week. The MSCI Developed Market Index has dropped 4.75% while the U.S. 10-year Treasuries have plunged 3.50% since June 18. Gold was harder hit at 6.72%. In China, tight central bank's policy to control credit growth has led to the recent liquidity crunch among the Chinese banks, with the seven-day repo rate spiking to a two-year high of 11.2% on June 20. On Tuesday, the central bank of China stated that it will stabilize the market rates and ease the tight liquidity. In the U.S., the May consumer confidence index surged to 81.4 compared to an expected 74.3. The April S&P/Case-Shiller housing index rose 12.1% year-over-year while the May existing home sales reached an annualized are of 5.18 million, a three-and-a-half year high. A better-than-expected U.S. growth and easier liquidity conditions in China led to the rebounding of global equities prices on Tuesday and Wednesday.

Subdue Physical Demand Response So Far

The Indian and Chinese consumers have not rushed to buy gold this time. The Indian government has restricted banks to lend gold-backed loans to curb gold imports. The end of the wedding season in India has also weakened demand. The cash crunch among the Chinese banks, the slowing economy as well as the market volatility have dampened the gold demand in Hong Kong and China, causing people to wait-and-see. Premiums in gold bars in Hong Kong are around $2.50 an ounce compared to $6 in May. According to the CFTC, hedge funds have cut their net positions by 2% across 18 commodities, and have reduced their net long positions in gold by 29% as of June 18. Barclays commented that the recent price plunge below $1,300 will likely lead to more selling by investors who accumulated below this level. The Chinese demand in the near-term and other central bank's actions will be the key to the turnaround of the already very weak sentiment in gold prices.

About the Author
Austin Kiddle

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

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