Gold looks for footing ahead of next week’s FOMC meeting

The U.S. Comex gold futures (COMEX:GCU13) retreated 0.44% in the past two days and rose 2.78% for the week to finish at $1,328.80 on Thursday. Year-to-date, the gold futures have dropped 20.71% although the prices have rebounded 12.67% from the recent trough of $1,179.40 on June 27. The S&P 500 index (CME:SPU13) has dropped 0.11% while the Euro Stoxx 50 index has risen 0.89% this week. The Dollar Index (NYBOT:DXU13) fell 0.77% this week as the dollar fell against the euro, the pound, and the yen.

More Growth Outside of the U.S.

The gold prices have reacted positively to the latest jobless claims data in the U.S. and the CPI data in Japan. The weekly unemployment claims in the U.S. were higher than expected at 343,000 while the June durable goods orders jumped 4.2% compared to the expected 1.4%. Helped by Germany, the July Euro-area flash PMI index unexpectedly expanded to 50.1. The July business climate index in Germany rose 0.3 to 106.2. The Eurozone economies are stabilizing at a time when China is slowing down. Japan's June CPI rose 0.2% compared to -0.3% in May while the CPI excluding fresh food jumped 0.4% from 0% in the prior month. In anticipation of the rise in the consumption tax next April, prices should continue to rise in Japan while the BOJ is likely to step up its stimulus measures to prevent a hit to the household consumption.

The Demand and Supply of Gold

The World Gold Council expects that the Chinese gold demand will reach 950 to 1,000 tonnes this year, and China will surpass India to be the world's largest consumer. The Council predicts that the central banks will add 400 tonnes of gold this year, down from 532 tonnes last year. However, jewelry demand, which has responded well to the drop in gold prices, is expected to rise as a percentage of total gold demand for the first time in twelve years. While the gold prices have fallen 20% this year and will remain reactive to economic data, at a price of $1,300, most companies in the gold mining industry are unprofitable. In the longer run, mine supply shortage will develop, supporting gold prices.

What to Watch

Next week, we shall monitor the June industrial production in Japan on July 29, the U.S. FOMC rate decision and the U.S. preliminary Q2 GDP on July 31, the monetary policy announcements by the ECB and the BOE and the July manufacturing PMI for China, the Eurozone, and the U.S. on August 1 as well as the U.S. July non-farm payrolls and the July unemployment rate on August 2.

About the Author
Austin Kiddle

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

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