Capital repatriation, weaker financial markets support gold

After rising 4.47% in the past week, the U.S. Comex gold futures (COMEX:GCU13) inched up 0.12% this week to $1,372.60 on Tuesday. From the recent trough on June 27 at $1,179.40, the futures have rebounded 16.4% although they are still down 18% year-to-date. The Dollar Index (NYBOT:DXU13) fell to 81.126 on Tuesday after reaching a recent peak on July 9 at 84.753. The 10-year U.S. government bond yield closed at a two-year high at 2.8804% on Monday. With the U.S. bond yield surging, the S&P 500 index declined 0.21% this week after plunging 2.10% last week. However, the Euro Stoxx 50 index dropped 2.32% in the past two days after rising 1.01% last week.

Short-term Supportive Factors for Gold

Concerns on the Fed's QE tapering and the rising bond yields have impacted the emerging markets more than the developed markets. In the past three months, large emerging countries such as Indonesia, India, and Brazil saw their currencies dropping 10%, 12% and 14.75% respectively. Capital outflow out of emerging countries point toward capital repatriation back to the developed regions such as Europe. With the Euro area Q2 GDP outperforming expectations and an expected rise in the Euro area August PMI data this Friday, the U.S. dollar is faltering compared to the euro and the pound. A weaker dollar has provided support for gold prices. As the equity and bond markets wobble, gold is again viewed as a safe haven relative to the other financial assets.

Stabilizing Investor Demand

The holdings in the largest gold ETF, SPDR, have increased to 914.12 metric tons since the trough of 909.33 metric tons reached on 8 August. The demand for the 99.99% purity of gold, the benchmark spot contract in China, has been strong whenever prices drop, based on the data from the Shanghai Stock Exchange. Despite rising physical demand, Barclays pointed out that the supply overhang of 217 tonnes in H1 2013, based on the data from the World Gold Council, is still large. Physical demand would need to stay strong to counter the excess supply, or gold prices will fall.

The highlight of the week will no doubt be the release of the July FOMC minutes on Wednesday as investors gauge whether the Fed will start tapering in September as expected, which can support the U.S. Dollar.

About the Author
Austin Kiddle

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

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