Dreams About Central Banks and Gold

Again this morning base metals are trading sluggishly with aluminum and zinc slightly down while other metals are marginally up by 0.17 percent at London Metal Exchange. The continued slowdown in China is weighing heavily on the metals family. This morning Chinese services PMI reported below the previous adding to the ongoing economic problems in China.

The Asian equities are also trading weak after negative US releases yesterday coupled with looming uncertainty in the Euro-zone. Further, the Chinese demand has remained weak and has largely been mitigated by South Korea as the heartland has procured huge metal stockpiles recently limiting downside in metals. Even the US vehicles sales have rebounded and improved consecutively for the second month and may support gains in aluminum prices ahead in the session.

Markets are eying the ECB rate decision scheduled tomorrow, while the ECB President has commented that “We cannot pursue price stability now with a fragmented euro area because changes in interest rates affect only one country, or two countries at most, They have no importance whatsoever in the rest of the euro area.” Expect the ECB to refrain interest rate cut and may propose plan for short term bond buying. Hence, tomorrow’s meet would provide further clues regarding the ECB’s plan and the shared currency is likely to remain sluggish and may disappoint gains during the day.

From the economic data front, the Euro-zone PMI numbers are likely to remain weak while the retail numbers may also decline and may continue to support downside in base metals. From US, the non-farm productivity and unit labor cost are likely to improve slightly and may help in recovering base metals.

As long as the US macroeconomic releases continues to disappoint, hopes of easing amplifies, on the back of which gold remains solid. After marking off the $1700, a level that was seen last in March 2012, gold holds nerve ahead of the mostly eyed ECB meet on Thursday. At present it has seen hardly any change at the Globex while the Asian stocks were hit on the back of slowing US economy.

Keeping the ECB reference rate intact with resumption in bond buying and an indication of higher inflation would be a supportive factor for euro and gold as well. However, the Euro area PMI numbers may stay more or less at the prior level later today while the Euro zone GDP may continue to shrink. The US releases however are expected to be slight positive for dollar in terms of increasing productivity and unit labor cost.

Gold holdings  of SPDR gold trust, the largest ETF backed by the precious metal, increased to 1,293.14 tons, as on Sept 4. Silver holdings of iShares silver trust, the largest ETF backed by the metal, declined to 9,642.97 tons, as on Sept 4. Gold producers’ average total cash costs jumped 19% to a record $727 per ounce in the first half as output was little changed, as per Thomson Reuters GFMS.

Gold output rose slightly to 1,366 tons in the first half from a year earlier and second-half supply is expected rise 1.7% percent year-on-year to 1,482 tons, as per GFMS. Holdings of gold-backed exchange-traded funds rose to a record high of 71.889mn ounces (2,038 tons) by Sept. 4 while Silver ETF holdings stood at 501.503mn ounces, easing from 504.431mn hit in late August, the highest level since May 2011.

The Federal Reserve could act soon to shore up the frail economy. As the weak data reinforced expectations for another round of quantitative easing by the Fed, the ECB is under increasing pressure to cut excess borrowing costs ahead of a policy setting meeting on Thursday. Investors may adopt a cautious approach before the meeting, and the all-important U.S. non-farm payrolls data due on Friday. 

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