The Fragile Floor of Gold Prices

The U.S. Comex gold futures dropped 0.39 percent in the past two days and 1.18 percent month-to-date to end at $1,308.10 on Tuesday. On Wednesday Asian morning, the gold prices rebounded about five dollars. In October, the prices fell 0.21 percent. The S&P 500 index was up 0.08 percent while the Euro Stoxx 50 Index fell 0.53 percent on Monday and Tuesday. The Dollar Index was flat in the same period.

Central Banks Indicate Dovishness

On 4 November, three voting Fed governors sounded a dovish tone for the U.S. economy, indicating that it would take some time for the Fed to achieve its dual mandate - the latest unemployment rate was still high at 7.2 percent while the inflation gauge was fairly low at 1.2 percent. Despite the government shutdown, the U.S. service industries ISM index rose to 55.4 in October from 54.4 last month, driven by the retail and real estate industries. In Europe, the big undershoot on inflation prompted analysts to expect a 25bp cut in the ECB rate on 7 November. While the central banks have continued their monetary easing this year, the dollar has not dropped significantly, or the gold price has climbed, causing some investors to re-evaluate how positive the QE really is.

Investor Flows

After a jump in the gold-backed ETP holdings on 22 October, the net redemptions have resumed. As of 5 November, the total holdings have dropped 757 tons year-to-date to 1,875 tons, the lowest level since April 2010. For the week ending 22 October, the CFTC reported that speculators' long positions have reached a seven-week high while the short positions have dropped 54 percent from the peak in early July and the gold prices have traded above $1,340. However, Barclays pointed out that the open interest data in the last week suggested long liquidation by tactical investors while the Indian Diwali gold purchases season was off to a slow start, providing a fragile floor for gold prices. While central bankers will continue to be net buyers of gold, the 2014 gold purchases may not keep up with this year's pace.

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