Gold cheered by rising inflation, physical demand expectations

After dropping 23% in Q2, the U.S. Comex (COMEX:GCQ13) gold futures have rebounded 1.81% so far in July. The Dollar Index is marching towards the 85 handle, after falling 0.29% last month. The S&P 500 index suffered its first monthly loss since October 2012 in June, but has rebounded 2.87% in July. The Euro Stoxx 50 index dropped about 6% in June, but has risen 2.36% this month. The CRB Commodities index suffered a loss of 7% in Q2 although it has risen 2.89% in July, led by the crude oil's rebound of 7.22%.

The ECB, the Chinese inflation and the U.S. Job Data

The news from Europe and China has supported gold prices this week and last week. Although the ECB left its policy rate unchanged at 0.5%, it states for the first time that interest rates will be at this level or lower for an extended period of time. The Portugal coalition rift sent the 10-year government bond yield to above 8% on July 3. The government will try to negotiate a higher deficit than 4% with the Troika. The Chinese June exports and imports both fell over a year ago, inciting fears of further economic slowdown. The fall in exports is likely correcting the earlier "inflated" exports data in the past several quarters. The June Chinese inflation accelerated 2.7% over a year ago, compared with the Bloomberg forecast of 2.5%. A rebound in Chinese inflation is supportive for gold because gold is viewed as a store of value, and a hedge against risky assets and inflation in many parts of Asia. The U.S. June non-farm payrolls rose 195,000, much stronger than the forecast of 165,000. The previous two months' data were revised upwards by a net 70,000, showing a rising momentum in job recovery. The June unemployment rate remains at 7.6%. On Tuesday, the IMF cut the 2013 global GDP growth forecast by 0.2% to 3.1%. It also lowered the 2013 U.S. GDP growth from 1.9% to 1.7% this year. It urges the developed world, which has enjoyed weak growth and low inflation, to continue with the stimulus programs.

What is Happening to Physical Demand?

So far, physical demand has not responded as enthusiastically to the gold price drop as in April. According to Barclays, the rolling monthly volume traded in the Shanghai Gold Exchange is about 20% below the April's peak. However, China's net gold imports from Hong Kong rose 40% in May. In India, gold imports plunged to 31.5 tonnes in June from 162 tonnes in May. With an expected good monsoon as well as the upcoming wedding season and Diwali, imports will likely rise in the second half of 2013. The U.S. Mint gold coin sales have risen 20,000 oz in the first week of July, compared to 34,500 oz. in July 2012. So far in 2013, the U.S. gold coin sales have reached 810, 500 oz., only 21,000 oz. below the entire 2012 level.

The market will intensely scrutinize the June FOMC minutes, which will be out this Wednesday.

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