The Eastern appetite for gold and China’s growth rebound

The U.S. Comex gold futures (COMEX:GCU13) were flat on Thursday after dropping 0.18% on Wednesday when the July FOMC minutes were released. Gold prices were roughly unchanged week-to-Thursday although the gold futures traded up to $1,378 during Asia Friday morning. The Dollar Index rebounded 0.72% in the past two days to finish at 81.488 on Thursday. The S&P 500 Index declined 0.58% on Wednesday but ended up 0.86% on Thursday. The Euro Stoxx 50 Index dropped 0.48% but rallied 1.36% on Thursday. The 10-year U.S. Treasury bond yield spiked up to 2.9344% after the FOMC minutes and finished at 2.885% on Thursday.

FOMC Minutes, China and Eurozone Expansion

The July FOMC meeting minutes revealed that the governors largely supported a reduction of asset purchases later this year (without any timing details) and the conclusion of the QE by mid-2014 should the unemployment rate fall to around 7%. Any interest rate tightening is unlikely before 1H 2015. Gold prices traded in a narrow range of about $30 given the Fed did not reveal much new information. The U.S. data were mixed. While the U.S. July leading indicators jumped 0.6% compared to zero percent in June, the latest initial jobless claims in the U.S. climbed to 336,000 compared to an expected 330,000. In China, the August flash manufacturing PMI expanded to 50.1 compared to 47.7 in July, the biggest gain in three years. The sharp rebound is supportive of gold prices. Led by Germany, the August Eurozone manufacturing PMI expanded to 51.3 compared to the expected 50.7.

Gold Demand Shifting From the West to the East

The recent gold price rebound has been driven by speculators closing their shorts. In the week ending Aug. 13, money managers closed about 3% of their long positions but closed 17% of their short positions. MacQuarie recently estimated that the gold bars from the ETF outflow have travelled to Switzerland, and are then re-melted into smaller size bars and coins to sell into Asia, mainly China and India. Indonesia's gold jewelry demand will likely jump 30% this year as income rises and the citizens catch up on the latest fashion trends.

What to Watch

We will monitor the June U.S. Case-Shiller Housing Price Index and the August U.S. consumer confidence index on Aug. 27, the St. Louis Fed and the Richmond Fed speeches on Aug. 29, Germany's August unemployment change, the U.S. four-week moving average initial jobless claims and the Japan July CPI and industrial production data on Aug. 29 as well as the July unemployment rate and the U.S. July PCE price index on Aug. 30.

About the Author
Austin Kiddle

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

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