Speculators cut gold holdings, but physical holders add

After inching up 0.15 percent last week, the U.S. Comex gold futures jumped 3.72 percent this week and ended at $1,361.10 on Thursday. During Asia Friday morning, the gold futures traded as high as $1,372.

The Dollar Index retreated 0.72 percent in the past two days and was flat week-to-Thursday. The S&P 500 Index and the Euro Stoxx 50 Index fell 1.94 percent and 0.20 percent respectively in the past two days.

Bond yields in major countries around the world have reached a one-month high according to Bloomberg. The U.S. 10-year government bond yield was as low as 1.63 percent on 2 May but reached 2.77 percent during Asia Friday morning.

Gold’s Correlation with Stocks Turned Negative
The most recent U.S. weekly jobless claims declined to 320,000, the lowest level since October 2007. As the concern of the Fed’s QE tapering mounts, bond yields around the world surge. Weaker earnings reports in the U.S. and increasing violence out of Egypt have hurt global stock markets in the past two days.

The stock investors are not much cheered by the end of the Euro region recession, with the Q2 GDP rising 0.3 percent. Gold has reasserted itself as the alternative asset to bonds and stocks. In fact, since the gold price has bottomed at the end of June, the daily correlation between the gold price and the S&P 500 index has turned negative. Since the recent trough on 27 June, the gold futures rebounded 12.34 percent while the S&P 500 Index only climbed 3.29 percent, reflecting the market’s perception of the value in gold.

The Two Stories of Gold
Filings show that John Paulson, the big gold investor, sold over half of his gold ETF positions during Q2 while other hedge fund managers including George Soros and Daniel Loeb got rid of their gold ETF positions.

On the other hand, the World Gold Council reported that consumers purchased 1,083.2 tons of gold in Q2, a jump of 53 percent over the year. Gold bar and coin purchases jumped to a record while jewellery demand reached the highest level since 2008 as buyers saw the value of gold after the price plunge.

The overall demand in gold dropped 12 percent to 856.3 tons in Q2, led by the 400 tons of ETFs selling by speculators and investors. Bloomberg reported that traders are most bullish since 8 March about gold prices next week.

What to Watch
We will monitor the July U.S. housing starts and building permits on Friday. The highlights next week will be the July FOMC minutes release and the July U.S. existing home sales on 21 August as well as the August flash PMI from China, the E17 and the U.S. on 22 August.

Austin Kiddle has been working in the precious metals market for the last 12 years and is a Director of Sharps Pixley.

Austin wears a number of hats and can often be found writing thoughtful and occasionally provocative pieces about the bullion markets.

For more information about Sharps Pixley, please visit www.SharpsPixley.com.