Two stories of gold

After inching up 0.15% last week, the U.S. Comex gold futures (COMEX:GCZ13) jumped 3.72% this week and ended at $1,361.10 on Thursday. During Asia Friday morning, the gold futures traded as high as $1,372. The Dollar Index (NYBOT:DXU13) retreated 0.72% in the past two days and was flat week-to-Thursday. The S&P 500 Index (CME:SPU13) and the Euro Stoxx 50 Index fell 1.94% and 0.20% respectively in the past two days. Bond yields in major countries around the world have reached a one-month high according to Bloomberg. The U.S. 10-year government bond yield was as low as 1.63% on May 2 but reached 2.77% during Asia Friday morning.

Gold's Correlation with Stocks Turned Negative

The most recent U.S. weekly jobless claims declined to 320,000, the lowest level since October 2007. As the concern of the Fed's QE tapering mounts, bond yields around the world surge. Weaker earnings reports in the U.S. and increasing violence out of Egypt have hurt global stock markets in the past two days. The stock investors are not much cheered by the end of the Euro region recession, with the Q2 GDP rising 0.3%. Gold has reasserted itself as the alternative asset to bonds and stocks. In fact, since the gold price has bottomed at the end of June, the daily correlation between the gold price and the S&P 500 index has turned negative. Since the recent trough on June 27, the gold futures rebounded 12.34% while the S&P 500 Index only climbed 3.29%, reflecting the market's perception of the value in gold.

The Two Stories of Gold

Filings show that John Paulson, the big gold investor, sold more than half of his gold ETF positions during Q2 while other hedge fund managers including George Soros and Daniel Loeb got rid of their gold ETF positions. On the other hand, the World Gold Council reported that consumers purchased 1,083.2 tons of gold in Q2, a jump of 53% over the year. Gold bar and coin purchases jumped to a record while jewelry demand reached the highest level since 2008 as buyers saw the value of gold after the price plunge. The overall demand in gold dropped 12% to 856.3 tons in Q2, led by the 400 tons of ETFs selling by speculators and investors. Bloomberg reported that traders are most bullish since March 8 about gold prices next week.

What to Watch

We will monitor the July U.S. housing starts and building permits on Friday. The highlights next week will be the July FOMC minutes release and the July U.S. existing home sales on Aug. 21 as well as the August flash PMI from China, the E17 and the U.S. on Aug. 22.

About the Author
Austin Kiddle

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

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