China Growth Rebound and the Eastern Appetite for Gold
The U.S. Comex gold futures were flat on Thursday after dropping 0.18 percent 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 percent in the past two days to finish at 81.488 on Thursday. The S&P 500 Index declined 0.58 percent on Wednesday but ended up 0.86 percent on Thursday. The Euro Stoxx 50 Index dropped 0.48 percent but rallied 1.36 percent on Thursday. The 10-year U.S. Treasury bond yield spiked up to 2.9344 percent after the FOMC minutes and finished at 2.885 percent 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 seven percent. 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 percent 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 13 August, money managers closed about three percent of their long positions but closed 17 percent of their short positions. MacQuarie recently estimated that the gold bars from the ETF outflow have travelled to Switzerland, and are then remelted into smaller size bars and coins to sell into Asia, mainly China and India. Indonesia’s gold jewellery demand will likely jump 30 percent 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 27 August, the St. Louis Fed and the Richmond Fed speeches on 29 August, 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 29 August as well as the E17 July unemployment rate and the U.S. July PCE price index on 30 August.
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