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Gold Rebounded, Awaiting European and Fed Actions

Gold futures bucked the trend of the broader market and jumped $38 or 2.5% on Thursday, the largest percentage increase since 25 October, 2011. S&P fell almost 2% while Stoxx and crude oil both dropped 1.5%. Dollar index rose for 14 consecutive days.

The April FOMC minutes revealed that several Fed members were in favour of new actions should economic slowdown become big enough due to U.S. fiscal contraction and European woes. Technically, gold has been in the oversold territory since 8 May, prompting investors and traders to do some short-covering and buying on dips.

News out of Europe continues to be worrisome. Moody’s has just downgraded 16 Spanish Banks after it cut the ratings of 6 European countries including Spain and Italy on 13 February. Fitch also cut Greece’s long-term credit rating from B- to CCC. The ECB said that it would temporarily halt lending to several Greek banks to lower risk. 10-year Spanish bond yield reached 6.31% on Thursday, a rise of almost 60bp since 6 May. Spain is clearly bearing most of the pressure from Greece’s political paralysis and the uncertainty of its Euro membership.

The economic news out of the U.S. and China also disappoints. The Philly Fed Manufacturing Index surprisingly dropped to minus 5.8 in April compared to a median forecast of 10. China’s April industrial production increased only 9.3% year-over-year. The last single-digit increase happened in May 2009. To increase liquidity, the Chinese government lowered banks’ reserve requirement by 50bp on 13 May.

World Gold Council (WGC) reported that China, central banks and ETFs buttressed the demand for gold in Q1 2012. Gold demand fell 6% year-over-year to 1,097.6 tonnes while average gold price was up 22%. However, China’s investment and jewellery demand rose 10% in Q1. Chinese jewellery demand was again the world’s largest, making up 30% of the world’s consumption. Marcus Grubb, Managing Director at WGC still expects China to be the largest gold consumer this year. He also estimates central banks’ purchase of gold to be close to 400 tonnes in 2012. In Japan, pension funds bought gold for their portfolios the first time as gold is considered a good currency substitute.

Next week’s events to watch include China’s HSBC flash PMI index, Germany’s IFO Index and the EU Summit with growth versus austerity and likely Greece at the top of its agenda.

Kelly Smith
Sharps Pixley, London
www.sharpspixley.com

18 May 2012 | Categories: Gold, China

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