Gold helped by weaker dollar and higher Chinese demand

After losing for six consecutive days, the gold futures (COMEX:GCU13) rebounded 2.14% in the past two days to end at $1,310.10 on Thursday. The prices jumped a further 0.3% during Asia Friday morning. On the contrary, the Dollar Index (NYBOT:DXU13) has dropped five days in a row, falling 1.14% this week, helped by the 2.35% appreciation of Yen against the Dollar. In the past two days, the S&P 500 Index was flat while the Euro Stoxx 50 Index rose 0.94%.

Demand Rebound in China and Bullish U.S. Data

The July China exports jumped 5.1% year-on-year versus the expected two percent while the imports surged 10.9% versus the expected 1%. The trade balance declined to $17.82 billion from $27.12 billion in June. Bloomberg highlighted that the exports to the U.S. and the EU markets have increased the first time since February. The higher than expected import growth indicates a Chinese domestic demand recovery, which will bode well for gold demand. The stronger than expected PMI data from the U.S. and Europe will likely support Chinese trade data going forward. Bloomberg also reported that the July Consumer Comfort Index in the U.S. rose to a five-year high while the four-week moving average of the jobless claims reached 335,500, the lowest level since November 2007.

Dollar Weakness

After reaching a high of 84.58 on July 9, the Dollar Index has lost 4.26%. Year-to-date, the Dollar Index has risen 1.5%. However, the 30-day historical volatility of the index has more than doubled from 4.14% at the end of 2012 to 9.20% currently, indicating that the market has been swayed by the mixed messages coming out of the FOMC meetings. The dollar weakness has led the traders to seek alternatives such as gold. Nevertheless, sentiment towards gold remains weak as the gold-backed ETP holdings fell to a new low since May 2010 on Aug. 7. However, ETP holdings in countries such as Japan and India have stayed constant when gold prices plunged this year, signifying that Asia and emerging markets will help shape the future gold demand.

What to Watch

This Friday, we will watch the July China inflation and industrial production data. We will also monitor the June E17 industrial production and the July U.S. retail sales on Aug. 13, the BOE bank rate vote and the preliminary Q2 GDP of E17 on Aug. 14, the July U.S. industrial production and the U.S. July CPI on Aug. 15 as well as the U.S. July housing starts on Aug. 16.

About the Author
Austin Kiddle

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

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