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Central Banks Hold On to their Gold despite Weak Gold Sentiments

The U.S. Comex gold futures rebounded 2.45 percent 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 percent. The Dollar Index dropped on Wednesday and Thursday by about 0.50 percent in total to 79.749 and fell about 0.67 percent week-to-Thursday. The S&P 500 Index and the Euro Stoxx 50 Index declined 0.77 percent and 0.59 percent respectively this week. The S&P 500 Index is now about three percent below its all time high on 19 September. The U.S. 10-year government bond yield ended at 2.6046 percent 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 tones in October after falling 25 metric tonnes in September and 708 metric tones 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 five percent 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 17 October debt limit deadline. We will also watch for the release of the September FOMC meeting minutes on 9 October, the IMF/World Bank meeting from 10 October to 13 October, the U.K. Bank of England monetary policy meeting and the U.S. initial jobless claims (four-week moving average) on 10 October as well as the U.S. September retail sales on 11 October.

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04 Oct 2013 | Categories: Gold

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