Gold volume thinning amidst uncertainty of the Fed's tapering

The U.S. Comex gold futures (COMEX:GCU13) fell for six consecutive days and ended at $1,282.60 on Tuesday. During Asia Wednesday morning, the gold futures fell a further 0.40%. The prices have already dropped over 2% this week while they went up 7.25% in July, the best month after January 2012. After rising 0.31% last week, the Dollar Index (NYBOT:DXU13) dropped 0.37% in the past two days. Both the S&P 500 Index and the Euro Stoxx 50 Index declined 0.72% this week.

Developing World Growth Slows while Developed World Data Improve

The thinning liquidity during the summer months and the earnings disappointment from HSBC, the largest European bank, have contributed to weakness in the stock and gold markets this week. HSBC pointed to slowing growth in the developing world especially in Asia and Latin America while the Fed is preparing to taper its QE bond purchases. The recent U.S. economic data have been mixed. The non-farm payrolls in July added only 162,000 compared to 188,000 in June. The PCE inflation index rose 1.3% in June, well below the Fed's two percent threshold. The July ISM services index jumped unexpectedly to 56 compared to 52.2 in June. Improving economic data has led the Chicago Fed President Evans, one of the biggest supporters of monetary stimulus, to suggest that tapering in September cannot be ruled out. Outside of the U.S., the June German order expanded 3.8%, the highest monthly change in eight months. The U.K. industrial production surged 1.90% in June compared to the expected 0.7%.

Investors Turn Negative while Physical Demand Eases

The gold-backed ETP holdings stabilized at the end of July, but the decline has resumed since month-end. The holdings have dropped about 675 tons since the peak of 2,632 tons reached on Dec. 20 last year. According to the CFTC, the net combined position in gold by managed money dropped for the first time in a month during the week ending July 30 as the number of shorts contracts rose and the number of the long contracts declined. In India, gold imports have ground to a halt recently due to the uncertainty over the government's curb on gold imports. According to Barclays, the jump in local bar premiums to $45/oz was driven more by the gold shortage rather than a surge in demand. The gold volume traded in Shanghai continues to ease while the bar premiums in Hong Kong, Singapore, and Tokyo have all fallen. The net gold imports from Hong Kong into China have dropped from 106 metric tons in May to 101 metric tons in June as the price outlook and the Fed policy remain uncertain.

About the Author
Austin Kiddle

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

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