Follow the Fed, the fabrication and the physical gold demand

July 17, 2013 04:47 AM

The U.S. Comex gold futures jumped one percent in the past two days to end at $1,290.40 on Tuesday, rising 6.4% in the past seven days. The S&P 500 index and the Euro Stoxx 50 index dropped 0.23 percent and 0.35% this week after rising 2.96% and 3.04% respectively last week. The Dollar Index fell 0.59% this week to 82.498 after a 1.73% decline last week. After reaching a recent high of 2.7391% on July 5, the U.S. 10-year government bond yield fell to 2.5317% on Tuesday.

In-line Chinese Growth Data and Stronger U.S. Data

China's Q2 real GDP grew 7.5% year-over-year and was in line with expectation. In Q1, the real GDP growth was higher at 7.7%. In the U.S., the June manufacturing production rose 0.3%, the fastest growth rate in four months. The June CPI also jumped more than expected to 1.8% from 1.4% in May. However, the June advance retail sales rose 0.4% compared to the expectation of 0.8%. The overall stronger U.S. data may support the start of the QE tapering later this year. The U.S. Fed's semi-annual congressional testimony on Wednesday and Thursday, especially the Q&A session, will be closely watched by the market for guidance of the Fed's timing of QE tapering.

ETP holdings, Miners' Hedging, and Physical Demand

The gold-backed ETP holdings appear to have stabilized at 1,986 metric tons although the holdings have dropped 646 metric tons this year. The ETP holdings rose 275 metric tons last year. The gold price has been hurt by the dwindling investment demand this year although fabrication and physical demand have picked up some of the slacks. As the gold price drops, the miners will likely need to hedge their gold production again, putting further pressure on the gold prices. In India, the government measures will likely curb the import demand further in the next six months due to the rising current account deficits. However, Chinese physical demand has continued to surge. According to Bloomberg, the Shanghai Gold Exchange delivered 1,098 metric tons of gold in the first half of 2013 vs. 1,139 metric tons in 2012, more than doubled the annual gold production in China in 2012. In addition, the central banks have continued to add to their gold reserves; net gold demand has risen 94.5 tonnes this year up to May. The European central banks have hardly sold their gold so far this year.

About the Author

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