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Gold Rebounded Strongly; Market Scrutinizes for European Implementation

Just when the market thought gold would head towards its worse quarterly performance since Q2 of 2004, the U.S. Comex gold futures surged 3.5% last Friday, ending at $1,604.2, down 3.9% for the second quarter. Gold continued its rebound to $1,621.80 on Tuesday this week.

During Q2, bonds and the Dollar Index outperformed stocks, gold and the broader commodities. The S&P 500 returned -2.75%, and the Stoxx 50, -5.29%, including dividends, while the CRB/Commodity Index fell 7.88%. The U.S. 10-year Treasuries rallied 56bp, while the Dollar Index surged 3.32% in the second quarter.

Stocks, the Euro, commodities and gold surged last Friday upon the news that the European leaders agreed to ease loan rules for Spain, and probably for Italy, and also paved the way for a Eurozone banking supervisor. ECB might be able to recapitalize European banks directly via the bailout funds. However, these are just small, first steps towards full banking and fiscal unions, with protracted and difficult negotiations to be expected in the next several weeks and months. The size of the two European rescue funds, about 500 million Euros, pales in comparison to the debt liabilities of Spain and Italy. Also, Germany’s Merkel once again rejected the idea of shared debt liability.

While details and negotiations will take time to emerge, the Eurozone manufacturing index and the China HSBC PMI continued to contract in June, while the U.S. June ISM Manufacturing index unexpectedly contract. Weak data led the markets to speculate that the ECB may lower interest rate on 5 July by at least 25bp, while China and the U.S. may announce further easing measures, fuelling the gold price. Gold, with its tight supply, may be favoured by investors over industrial metals.

In the meantime, Bloomberg reported that the gold-backed ETP holdings surged to 2,412.422 metric tons, a record high, while the EPFR Global reported that gold funds were among the few categories which saw positive flows in Q2 2012. Recently, the Bombay Bullion Association expects that Indian gold imports could rise from 250 tonnes in the first half to 300 tonnes in the second half, if the Indian gold price stays around 30,000 Rupees per 10 grams.

Traders will be closely watching if the Euro/Dollar level can hold up, what the ECB may do and how the Spanish government bond auctions will turn out this Thursday.

Robert Jilles
Sharps Pixley, London

04 Jul 2012 | Categories: Gold

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