Will the Re-birth of Uncertainty and Consumer Demand Fuel Gold?

Last week's dismal report of unemployment data reminds investors that the labor market may not be strong enough to sustain the economic momentum needed for a recovery without more monetary stimulus from the Fed. More stimulus would then bring about higher gold prices and increased inflation.

Austin Kiddle
April 10, 2012
Sharps Pixley

It was an eventful week for gold. The Comex futures plunged $72 from the week’s high at $1,685 and then recovered to $1,630 on 6 April, down 2.35% for the week. Gold futures opened at $1,643 on Tuesday in Asia and climbed to $1,653 at the time of this writing. From this year’s peak on 28 February at $1,792.7 gold price has declined 8% though it is still up about 5.5% in 2012. The dollar index rose 1.1% while the MSCI World (developed) index declined 1.7% last week.

Many market participants have attributed the drop in gold price since end-February to a diminishing chance that the U.S. Fed will adopt QE3. The rally in risky assets such as global equities due to better economic growth number, albeit lopsided from the U.S., led some to reduce safe haven bets such as gold.

A surprisingly soft U.S. employment data last Friday, an increase in payrolls of 120,000, reminds investors that U.S. labour market may not be strong enough to sustain economic momentum on its own without further monetary stimulus from the Fed.

The rebirth of uncertainty takes place when the Spanish 10-year bond yield surged 40 basis points last week as investors were expecting Spain, like Greece, Ireland and Portugal, would need to request for international aid. Spain is the most closely-watched country as the bellwether for Europe’s sovereign debt crisis. The higher than expected China’s March CPI number of 3.6%, compared to median economists’ forecast of 3.4%, may bring more uncertainty to China’s monetary easing.

CFTC data confirms that the net speculators’ positions on gold declined from this year’s peak of 221,542 at end-February to 149,599 as of the week ending 3 April. The technical position for gold appears better as some of the “weak longs” have been removed from the market.

Though too early to tell, the re-opening of the Indian Jewellers for business last Saturday should bring out the pent-up demand. The Indian consumers will gear up for the Akshaya Tritiya festival on 24 April as well as the wedding season. Physical demand especially from India and China is the key supporting factor for investment demand for gold.

This week Q1 U.S. earnings season will kick-start which should influence the risk sentiment as well as the U.S. dollar direction. Stay tuned.

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