The Currency of Gold is Finding its Anchor

After declining 1.90% last week, the U.S. Comex gold futures dropped another one percent week-to-Tuesday to $1,281.10. The price rebounded 0.30 percent during Asia Wednesday morning. The S&P 500 Index climbed 0.79% this week while the Euro Stoxx 50 index jumped 1.39%. So far in April, the European stocks were up 1.46%, the U.S. stocks were up 0.48% while the U.S. gold futures were down 0.18%. The U.S. ten-year government bond yield hovers around 2.71% this week, almost no change from the level at the end of March.

Dampening U.S. Housing Recovery and Subdue Chinese Data

The February U.S. housing prices increased 6.9% year-on-year, the lowest rate of increase since January last year. The sales of existing homes fell to 4.59 million in March compared to a recent peak of 5.38 million in July 2013. Housing prices have risen as the bad winter weather has limited the supply of houses. Prices have risen faster than wages, dampening the housing recovery. However, the U.S. economic outlook in the next three to six months unexpectedly jumped 0.8% in March compared to 0.5% in February. In China, the flash HSBC manufacturing PMI remained in a contraction mode at 48.3 in April. The slowdown in China has led the government to announce more infrastructure spending and tax relief as well as a cut of the reserve requirement ratio by two percent for some rural banks.

The Changing Nature of Commodity Trading

Barclays, JP Morgan, Deutsche Bank, Bank of America, and Morgan Stanley have all pulled back their global commodities trading activities as regulators have tightened up trading rules for banks and raised their trading costs. Trading revenue also fell by 18% in 2013 for the top ten banks to $4.5 billion compared to $14.1 billion in 2008 based on Coalition's estimates. These banks are also consolidating their gold trading with their foreign exchange trading in electronic trading platforms as both markets are liquid and are heavily influenced by macroeconomic policies, interest rates, and inflation.

Speculators' Positioning

Managed money's net combined gold positions fell for four consecutive weeks to 90,137 contracts as of 15 April, led by a 15% jump in the short positions. The gold-backed ETP holdings fell to a recent low of 1,735 metric tons, down from a recent peak of 1,769 metric tons a month ago. In the short-run, the renewed tension between Ukraine and Russia on the militants in Eastern Ukraine will help boost gold prices. In the longer-run, the rising household demand in China for gold bars, coins, and jewelleries and a possible reduction in gold's import duty in India will put a solid floor to gold prices.