More gold capitulations at quarter-end

The U.S. Comex gold futures touched a low of $1,196.10 on Thursday, and are heading towards a loss of over 24% for Q2. Since the recent FOMC meeting on 18-19 June, the gold futures have lost 12%, the S&P 500 index has dropped 2.8% while the Euro Stoxx 50 index has declined 3%. The stocks and commodities markets have not only reacted negatively to a more definitive plan from the Fed to taper its bond purchases but also to the rising bond yields. The U.S. 10-year government bond yield has risen 63bp month-to-date to 2.477%. The S&P 500 index rebounded 1.58% while the Euro Stoxx 50 index surged 3% in the past two days. The Dollar Index finished at 82.902 on Thursday, down from 83.375 at the end of May.

Month-end Liquidation

A few factors have helped to push down the gold prices further this week. The latest catalyst came from the stronger U.S. data. The U.S. pending home sales surged 6.7% in May compared to a median forecast of 1% while the jobless claims fell 9,000 to 346,000 in the recent week. Institutional investors and traders are liquidating their gold positions for month-end and quarter-end window-dressing. The gold prices have also followed the break-even inflation rate of the 10-year TIPs lower. The holdings in the largest gold ETF, GLD, is now below 1,000 metric tons, back to the level in early 2009. Continuous selling by the ETF investors and the large speculators has led to an oversold position in gold as measured by the RSI, which reached 13.7 on Thursday.

Longer-run Offsetting Factors

While the momentum for gold is clearly down and the investors are disillusioned, several factors can help to prop up the gold market in the second half of 2013 according to GFMS. The sovereign debt crisis in Europe and the U.S. may resurface later this year. The U.S. economy may recover more slowly and cause the Fed to postpone the bond purchases tapering. The equity markets may hit a wall. The supply of gold will be cut as gold prices plunge below the cash costs. Also, the fabrication demand may rise as a result of the fall in gold prices.

What to Watch

We will watch the final June U.S. and China manufacturing ISM data and the E-17 unemployment rate on July 1, the ECB's interest rates decision and press announcement on July 4 as well as the U.S. June non-farm payrolls and unemployment rate on July 5.

About the Author
Austin Kiddle

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

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