Will Stocks Correct and Gold Demand Rise?

After falling for four consecutive weeks, the U.S. Comex gold futures rebounded 0.29 percent last week and climbed almost one percent this week, ending at $1,591.70 on Tuesday. The CRY Commodities index followed a similar pattern, rebounding 1.39 percent last week and 0.45 percent this week. The S&P 500 inched up 0.08 percent after rising 2.17 percent last week while the Euro Stoxx 50 index fell 0.62 percent this week after surging 4.28 percent last week. The S&P 500 index is only 9 points from an all-time high.

U.S. Strengthens While China and Europe Weaken

The U.S. labour market has continued to show improvement. On 8 March, the February unemployment rate fell to 7.7 percent from 7.9 percent while private jobs grew much more than expected at 246,000. The amount of people being let go reached a 12-year low in January, reflecting a tighter business condition. In contrast, the January U.K. industrial production fell 1.2 percent from December, triggering concerns that the U.K. will be in recession for the third year and causing the British Pound to sell off. The ECB’s accommodative stance will continue for as long as it is needed according to the ECB council member Jens Weidmann. In China, the industrial production grew 9.9 percent and the retail sales rose 12.3 percent year-on-year in January and February. These data were weaker than expected while inflation rose faster at 3.2 percent in February, raising some concerns that the Chinese growth is weakening while the inflation is rising. On balance, the gold market is cheered by the expectation of further stimulus from the ECB, the U.K. and Japan.

Funds Leaving Commodities

According to the CFTC, hedge funds reduced their net-long positions to a four-year low in 18 commodities for the week ending 5 March. Rising commodities prices led to growing supplies, dampening the sentiment towards commodities. The EPFR Global reported a $4.66 billion outflow from commodities so far this year. In particular, the holdings in gold-backed ETPs fell 106.2 tons in February and 21.9 tons in March. The drop in commodities prices has led to investment houses such as Goldman Sachs to predict rising commodities prices during the next three months. Marc Faber also expects that equity prices will correct while the demand for gold will rise again. For now, the physical demand from China and India as well as the rising European debt concerns are supportive for gold prices.