Gold for Capital Preservation - European Demand for Gold Rose in Q2
The U.S. Comex gold futures rebounded by 1% in the past two days, in
line with the rise in the external markets. The S&P 500 index
rebounded 0.82%, the Stoxx 50 rose 1%, while the CRB Commodities Index
went up 0.69%. The Dollar Index fell slightly by 0.15% to 82.357, while
the U.S. 10-year Government bond yield surged almost 10bp in the last
two days to 1.8346%.
Talks of global central banks easing have been boosting gold’s
sentiment. Foreign direct investment into China fell 8.7% in July from a
year ago, and the level touched a two-year low. Recently, Premier Wen
of China suggested the government would reach their economic and social
targets this year despite the substantial downward force, leading to
market expectations of more monetary easing. In the U.S., while July’s
building permits rose to a four-year high, the New York manufacturing
index actually fell in August, and the U.S. monthly change in the CPI
remained at 0% for the second month. The European Q2 GDP’s contraction
also boosts hopes for more monetary easing.
Although the CFTC data showed hedge funds and traders have reduced their
net positions in gold by about 57% since February, as reported by
Bloomberg, hedge fund manager John Paulson has actually boosted his
holdings of bullions to 44% of his capital as of Q2.
The World Gold Council (WGC) recently reported that gold demand reached
990 tonnes in Q2, down 7% from a year ago. The weaker trend in
investment, jewellery and technology demand for gold, was compensated by
the Central Banks’ surging appetite, which led to the largest quarterly
increase since Q2 2009. Though both China’s and India’s gold consumer
demand declined year-on-year in Q2, retail investment demand ex-China
and India actually rose 16%. In particular, the European purchase of
bullion bars and coins rose 15%, revealing investors’ demand for gold
for capital preservation in light of the European debt and banking
crises. The WGC particularly highlighted Russia will continue to be a
driving force in the gold market. It is now the fourth largest consumer
of gold jewelleries, and has the world’s eighth largest gold reserves.
Next week, the market will likely focus on the Fed’s July FOMC minutes
on 22 August, the “Flash” manufacturing PMIs for China, and the EU on 23
August, and the monthly change in the U.S. July durable goods orders on
24 August.
Austin Kiddle
Sharps Pixley, London
www.sharpspixley.com