Investors sell gold as the U.S. economy strengthens more than expected

The U.S. Comex gold futures (COMEX:GCU13) have dropped close to 1% since the FOMC meeting on July 31 and ended at $1,310.80 on Thursday. During Friday in Asia, the gold futures have faced further selling pressure before the U.S. payrolls data. The Dollar Index declined 0.46% on Wednesday but surged 1.09% to end at 82.336 on Thursday. The crude oil futures jumped 2.72% on Thursday after surging 1.89% on Wednesday. The S&P 500 index climbed 1.24% while the Euro Stoxx 50 index surged 1.79% in the past two days. The S&P 500 index scored a new record this week.

Economic Data and Central Banks Policies

The gold futures have dropped in the past three days as the stronger U.S. economic data has strengthened the case for QE tapering in September. The Q2 U.S. annualized GDP growth was 1.7% compared to the expected 1.1%. The July ISM manufacturing index was also higher than expected at 55.4 while the weekly initial jobless claims were 19,000 lower than expected at 326,000. In China, the official July PMI unexpectedly expanded to 50.3 from 50.1 in June. However, the HSBC Markit PMI data, covering smaller private companies, saw a fall to 47.7. In the Euro-area, the July Markit manufacturing PMI was higher than expected at 50.3. The ECB President intends to keep interest rates low for an extended period of time and sees the Euro-area economies stabilizing. The BOE has also kept the interest rates unchanged while the U.K. July PMI jumped to 54.6 compared to 52.5 in June.

Factors Beyond the U.S.

On the same day of the FOMC meeting, the World Gold Council (WGC) released a report urging gold investors not to overestimate the impact of the rising interest rates and the tightening of the monetary policy in the U.S. on the gold prices. Nominal interest rates between 2.5% to 6.5% are normally associated with an average annualized gold return of six to seven percent. Emerging markets are now making up about 70% of the annual gold demand while the investment demand in the U.S. including ETF demand is only ten percent. In fact, the LBMA has reported that the net amount of gold transferred between gold clearers reached a 12-year high in June. Other drivers of gold prices will be the demand from the central banks and the likely decline in supply.

What to Watch

The market will clearly focus on the July U.S. non-farm payrolls and the unemployment rate on August 2. We will also monitor the Bank of Japan's target rate announcement, the ECB monthly bulletin, and the Chinese July trade data on August 8 as well as the July China inflation, industrial production, and fixed investments data on August 9.

About the Author
Austin Kiddle

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

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