Central banks hold on to their gold despite weak sentiments

The U.S. Comex gold futures (COMEX:GCZ13) rebounded 2.45% in the past two days to $1,317.60 on Thursday after plunging to $1,286.10 on Tuesday. For the week, the gold futures have lost 1.55%. The Dollar Index (NYBOT:DXZ13) dropped on Wednesday and Thursday by about 0.50% in total to 79.749 and fell about 0.67% week-to-Thursday. The S&P 500 Index (CME:SPZ13) and the Euro Stoxx 50 Index declined 0.77% and 0.59% respectively this week. The S&P 500 Index is now about 3% below its all time high on Sept. 19. The U.S. 10-year government bond (CBOT:ZNZ13) yield ended at 2.6046% on Thursday, down about 2bp this week.

More Uncertainty in the U.S.

As the U.S. government shutdown has passed the third day, the Treasury Secretary warned that a debt default will lead to a recession that could be worse than the 2008 crisis. The U.S. credit default swap spread, an indicator of the U.S. credit risk, rose to 42 bp on Thursday compared to a high of 56 bp in July 2011 when the government was on the brink of shutdown and default. The latest weekly jobless claims rose 1,000 to 308,000. The September non-manufacturing ISM index rose to 54.4 compared to an expected 57. The crucial non-farm payrolls will not be issued on Friday due to the government shutdown. In Asia, China's September non-manufacturing PMI rose to a six-month high while the Bank of Japan maintained its monetary stimulus as the recent manufacturing confidence has risen to the highest level since 2007.

Weak Gold Sentiment

Although the gold prices are holding above $1,300 in light of the uncertainty surrounding the U.S. budget and debt limit, the gold-backed ETP holdings have dropped another five metric tonnes in October after falling 25 metric tonnes in September and 708 metric tonnes year-to-date. The continuous decline in holdings reflects a further weakening in gold sentiment despite the uncertainty in the U.S. When gold prices dropped almost 5% in September, the gold premium in China also did not rise as high as expected. The ones who beg to differ are the central bankers who have either held on or added to their gold reserves this year, viewing gold as an important diversifier.

What to Watch

We will watch how the U.S. budget talk unfolds before the Oct. 17 debt limit deadline. We will also watch for the release of the September FOMC meeting minutes on Oct. 9, the IMF/World Bank meeting from Oct. 19 to Oct. 13, the U.K. Bank of England monetary policy meeting and the U.S. initial jobless claims (four-week moving average) on Oct. 10 as well as the U.S. September retail sales on Oct. 11.

About the Author
Austin Kiddle

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

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