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Capital Repatriation, Weaker Financial Markets, and Investment Demand Stabilization Support Gold

After rising 4.47 percent in the past week, the U.S. Comex gold futures inched up 0.12 percent this week to $1,372.60 on Tuesday. From the recent trough on 27 June at $1,179.40, the futures have rebounded 16.4 percent although they are still down 18 percent year-to-date. The Dollar Index fell to 81.126 on Tuesday after reaching a recent peak on 9 July at 84.753. The 10-year U.S. government bond yield closed at a two-year high at 2.8804 percent on Monday. With the U.S. bond yield surging, the S&P 500 index declined 0.21 percent this week after plunging 2.10 percent last week. However, the Euro Stoxx 50 index dropped 2.32 percent in the past two days after rising 1.01 percent 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 percent, 12 percent, and 14.75 percent respectively. Capital outflow out of emerging countries point towards 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 percent 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.

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21 Aug 2013 | Categories: Gold

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