Gold Prices Bounded by Stimulus Expectation and Weaker Physical Demand

The U.S. Comex gold futures reached $1,320.80 on Thursday before settling at $1,314.90 at the end of the day, up 0.37% for the week. Year-to-date, the gold futures have returned 9.37%, compared to 7.13% for the S&P 500 Index, 1.28% for the Euro Stoxx 50 Index, and 3.08% for the CRB Commodities Index. In the past two days, the S&P 500 Index has rebounded 1.11% while the Euro Stoxx 50 Index has climbed 1.14%. The Dollar Index has also surged this year by 1.94% to 81.588 on Thursday. The ten-year German Bund yield plunged below one percent briefly on Thursday while the U.S. ten-year government bond yield dropped 2bp this week to 2.402% on Thursday as economic news from the two countries was weaker than expected.

More Central Bank Stimulus?

Global economic recovery is facing headwinds with China’s financing growth being much weaker than expected, the U.S. latest jobless claims climbing to 311,000 compared to 295,000 expected, and the Eurozone posting a zero percent growth in Q2 compared to 0.2% in Q1. The Bank of England governor could hold interest rates constant for longer. Global stocks and gold rallied as markets expect more monetary stimulus and a prolonged period of low interest rates in the core markets. Russia called for a cease-fire to deliver humanitarian aids across Ukraine’s border.

Gold Demand Normalizing

While the hedge fund investor John Paulson has kept his SPDR gold trust holdings unchanged for four consecutive quarters, the World Gold Council reported that the gold demand has fallen 16% year-on-year in Q2, a return to a normalized long-term trend after the gold demand surge in 2013. In particular, the gold jewellery demand, more than 50% of global demand, fell 30% year-over-year. However, jewellery demand rose 11% compared to Q2 2012 with China and India being the drivers. Total investment demand rose four percent, helped by the big decline in ETF outflows (about one-tenth) in Q2 2014 compared to a year ago. Central banks have added gold for fourteen consecutive quarters.

What to Watch

Next week, we will watch the U.S. July inflation data and the July housing starts on 19 August, the minutes of the Bank of England August meeting and the FOMC July meeting on 20 August as well as the August flash manufacturing PMI for China and the Eurozone, the U.S. August Markit PMI, and the U.S. July Leading Indicators Index on 21 August.