Uncertainty Drives Gold Price

Hopes remain strong for current gold prices this week after Friday’s CFTC report showed hedge funds and money managers increased their bullish bets on gold for the first time in a month thanks to increasing uncertainty over the US’ economic recovery.

Policy meetings
This week we see the final policy meeting for Sir Mervyn King as Governor of the Bank of England. Yesterday we heard Sir Mervyn say that he had lost no sleep during the financial crisis as he was confident in his knowledge of economics and history that he would know what was required. He also continues to express his belief that the economy is recovering.

No change in policy is expected from the MPC meeting, next month’s meeting will no doubt be interesting when Mark Carney joins the fold. Sir Mervyn has repeatedly cast his vote for further QE in previous meetings, so there is an outside chance that monetary policy is loosened but he will have to persuade more than the two members who are currently on his side.

The ECB will also meet on Thursday, like the Bank of England, and there is a small chance that a further rate cut could be voted in in order to charge banks for storing money at the central bank.

Earlier in the week the Reserve Bank of Australia will also meet, the chances of a rate cut are much more probable compared to their European counterparts. The decision to cut rates is likely to come in the face of slowing growth at home and trade with China.

US non-farm data

On Friday all eyes will be turned to the US’ non-farm payrolls and unemployment data. Given the Fed’s agenda on jobs and its impact on QE the data is likely to affect stock and equity markets similarly. Previously this year data has been stronger than expected prompting expectations that the FOMC will slowdown bond purchases sooner than expected, this has clearly also had an impact on the gold price.

Last week there was stronger than expected US economic data which saw the price of gold fall by almost 2%. Data showed lower than expected inflation and improved consumer confidence. Whilst August gold futures on the COMEX fell on Friday to $1,393/oz they remained up on the week. Meanwhile open interest in US gold futures were at their lowest level in almost four years according to Reuters.

There remains to be any clear data which will sway the FOMC’s decision regarding bond purchases, last week we saw weaker than expected data regarding jobs and growth, prompting gold to rise for three sessions. However data at the end of the week had other ideas.

Faith in the strength of the US economic recovery and therefore that the FOMC will ease off bond purchases saw global bond markets post their biggest monthly losses in nine years, according to Bloomberg.

On the flipside, Bloomberg also reports ‘hedge funds raised bets on a gold rally by the most in two months as the U.S. economy expanded less than previously estimated, boosting speculation the Federal Reserve will maintain the pace of stimulus.’

Many people choose to invest in gold as a hedge against uncertainty, clearly now seems a more uncertain time than previously.

Holdings in the SPDR Trust (GLD) remained unchanged on Friday, having risen slightly on Thursday. Deutsche Bank believe sales and outflows may largely be over.

As expected, silver dropped for the fourth consecutive month in May, its longest losing streak since June last year. According to Bloomberg holdings in silver-backed ETPs saw silver bullion holdings reduced by 2.4% in May, the most in two years.

China helps support gold

This morning gold has recovered thanks to stronger than expected PMI data from China, the world’s second largest economy and second biggest gold consumer, prompting hopes that its recovery may now be underway.

It wasn’t all rosy for China however as manufacturing data released over the weekend showed output fell in May for the first time in seven months.

See our Social Gold Mine article on the latest decision by India’s government to increase import duties on gold. Speaking of India, the WGC said on Friday that they expect the country’s gold demand for the second half of 2013, to remain as robust as 2012. This is attributed to the ‘good monsoon rains’ that are expected and therefore drive demand from farmers.