Investors Add to Gold ETPs in the Face of Deepening European Credit Crisis

 

The U.S. Comex gold futures fell 0.76% to $1,609.4 on Thursday. Gold prices have surged 3.8% since last Thursday, boosted by the initial market optimism towards the EU Summit's conclusions. Having jumped 3.38% since last Thursday, the S&P500 was down 0.47% on Thursday, while the Stoxx50 retraced 1.53%, after having surged 7.54% since last Thursday. The Euro/Dollar fell to 1.2384 as of Friday morning in Asia, giving up all of its gains since the announcements at the EU Summit on 29 June, while the Dollar Index is now at 82.836, back to the level on 28 June.

The U.S. dollar index rebounded while the Euro/Dollar sold off. The U.S. unemployment claims fell 14,000 last week to 374,000, and the private employers added 176,000 jobs, while the ECB cut rates by 25bp on Thursday, supported by the worsening economic contraction in Europe. Prior to the ECB announcement, China also cut its lending rates by 31bp and the deposit rates by 25bp, in order to stimulate lending growth, and to keep its economic recovery on track in 2H 2012. The Bank of England restarted its bond purchasing program or quantitative easing measures, citing higher banks' borrowing costs because of the worsening credit crisis in Europe.

Gold was not able to extend its gains from last week, despite the global central banks' efforts to stimulate their economies. In the short-term, disinflationary forces around the globe, and the concern that the U.S. might not need to do QE3, are putting a damper on gold's advance. However, a number of houses including Goldman Sachs and Societe Generale are still calling for a QE3 in the U.S., and expect the gold prices to be well-supported by a lower real interest rate.

While the European crisis deepens, investment demand for gold has continued to climb. The holdings in gold-backed ETPs rose to 2,413.61 tons, an all-time high, as of Wednesday, according to Bloomberg. Blackrock reported that investors switched out of the U.S. Treasuries ETPs and added $2.2 billion to gold-backed ETPs in June.

All eyes will be on the U.S. June non-farm payrolls change on Friday, with the median forecast at 100,000. Market will watch for the Eurogroup meeting next Monday on Spanish bank aid, and the new loans and M2 growth data from China next Wednesday, as well as China's Q2 GDP growth number next Friday.


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