Case for gold unchanged as Asia buys, Western ETFs fall to 2010 levels

The price of gold slipped from one-week highs at $1,260 per ounce lunchtime Tuesday in London, as European stock markets cut earlier gains and commodity prices held flat.

Fresh gold investing demand in Asia was strong overnight, according to dealers. Traders also cited new Chinese inflation data – which came in above analyst forecasts for June at 2.7% – plus "stops being triggered" as gold prices rose through $1,240. 

"We are now back to the levels of last week," says broker Marex Spectron, "pre-NFP."

Friday's non-farm US payrolls data saw gold drop $20 per ounce – "a pointless move down to $1,210," says Marex. "Although it gave us the opportunity to buy the dip!"

Despite being "medium-term bearish" overall, "We still believe that an interim low is in place," says the latest technical analysis from Axel Rudolph at Germany's Commerzbank. "A corrective move higher towards the 1321.50 April low is currently underway."

On a fundamental level however, "No sustainable price recovery is likely" says Rudolph's colleague Eugen Weinberg at Commerzbank's commodities team "for as long as ETF outflows continue on this scale."

Exchange-traded gold trust funds lost another 15 tonnes on Monday as investing positions were reduced again.

That took global gold investment through ETFs below 2,000 tonnes for the first time since May 2010 according to Bloomberg data.

"Money managers are also retreating further from the gold market," says Weinberg. 

Latest data from the CFTC last night showed speculators in gold futures and options cutting their "net long" investing position as a group to just 108 tonnes equivalent.

Down four-fifths from the start of this year, the net long position of non-industry players in U.S. gold derivatives has now fallen 89% from the record peak of summer 2011.

Gold investing in China in contrast – now the world's second-largest consumer market for bullion – has been strong, market-maker HSBC notes.

"An indicator of good demand from China is bullion’s premium on the Shanghai Gold Exchange," HSBC said in a note Friday, "which more recently stood at $34/oz, significantly higher than the $10-$25/oz range seen in May."

The Shanghai Gold Exchange this week began an overnight trading session, extending trade until 2:30 a.m.

The 2013 price drop has also spurred net gold bullion buying by Japanese households, according to Tanaka – the country's largest chain of bullion retailers – the first such net addition to private holdings since 2004.

Japan's gold ETF sector has bucked the global trend too, Bloomberg reports today, with gold investing positions expanding 10% by weight against a 25% drop in Western ETF stocks.

"A lot of [Western] investors are starting to exit their hedge against unorthodox monetary policy in the U.S.," the newswire today quotes Dominic Schnider at UBS Wealth Management in Singapore. "As an insurance asset, gold, which worked out so well for people in the past few years, is not attractive anymore."

But "policymakers should be cautious in interpreting the plunge in gold prices as a vote of confidence in their performance," counters academic economist and author Kenneth Rogoff at Project Syndicate.

"The case for or against gold has not changed all that much since 2010," Rogoff believes, pointing to when prices were last at this level. "The real case for [gold investing], then as now, was never a speculative one. Rather, gold is a hedge...a form of insurance against war, financial Armageddon, and wholesale currency debasement."

About the Author

Adrian Ash runs the research desk at BullionVault.