Gold Recovers As Soft U.S. Data Dings Dollar; Market Eyes Physical Demand
By Allen Sykora MarketWatch.com
Right when it looked like gold might be on the ropes again, the metal got a reprieve Thursday when a slew of U.S. economic reports came out weaker than forecast, putting the dollar back under pressure and for now easing some of the worries about the Federal Reserve scaling back its ultra-loose monetary policy any time soon.
Meanwhile, some traders report that physical demand appears to have picked up again on price weakness this week, while another cites potential for short covering.
Around noon EDT, June gold was still lower by $8.70 an ounce to $1,387.30 on the Comex division of the New York Mercantile Exchange. However, the market was up nearly $20 from the overnight low of $1,368 that had been its weakest level since April 18.
"There is a shake in the bearish mantra that we had in the market that the U.S. economy is hunky-dory and you'd rather be long than stocks than gold," said Phil Flynn, senior market analyst with at Price Futures Group. "Some of the economic data today, especially the Philly Fed and big jump in jobless claims, probably raises the question of the momentum in the economy. Because of that, people who were selling gold - because stocks are the place to be - are covering their bets a little bit.
"After the data this morning, you saw the euro bounce back in a big way... People are thinking the data is not that good. Perhaps the talk of the Fed scaling back may be a bit premature or at least a little bit more premature than we thought before the data came out."
The euro was up to $1.2897 from an overnight low of $1.2847. The June dollar index fell 0.181 point to 83.78.
The U.S. economic scorecard Thursday included a 0.4% decline in the April consumer price index, 32,000 rise in weekly jobless claims, a 16.5% fall in April housing starts and decline in the Philadelphia Federal Reserve's business-conditions index to minus 5.2 in May from positive 1.3 in April.
"It (gold) was quite offered until the news out of the U.S. that was a bit bearish for the U.S. dollar," said Afshin Nabavi, head of trading with MKS (Swizerland) SA.
George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures, said he expects some buying to cover short positions from traders who do not want to hang onto bearish gold bets over the weekend.
Market participants will be watching to see if physical demand picks up, as occurred last month when a mid-April sell-off sent gold to its lowest level in two years. Buyers then rushed to snap up cheaper gold around the world, with premiums rising sharply and coin dealers reporting a flurry of orders.
This helped gold bounce more than $150 from the April low to May high. Nabavi said physical demand has remained strong and even appears to be picking up again as prices back down.
"If it wasn't for the physical demand we are seeing, I would guess that gold would be much, much, much, much lower," he said. "The physical demand has been extraordinary. For the last three or maybe four weeks, the demand has been very strong. Since that move down this Monday, the physical demand has picked up tremendously."
Standard Bank strategist Walter de Wet said Asian demand remains strong, with the Shanghai Gold Exchange physical premium back above $20 after falling toward $15 last week.
Still, some observers cautioned that should gold break down through its lows from April, there is potential for some buyers to hold back to see just how far the metal might fall before stepping back in.
Nabavi said $1,400 area continues as chart resistance, at least for now.
Rob Kurzatkowski, senior commodity analyst with optionsXpress, said fresh lows below $1,350 an ounce could result in further selling pressure. However, he added, the Relative Strength Index fell to "oversold levels, which could be supportive in the near term."
Flynn said he's still a long-term bull for gold, although he also would not be surprised to see the correction lower continue as far as $1,300 to $1,280, an area where he would expect support.
"I think that the stock market is getting a bit overextended here," he said. "I think gold by the same token is getting overextended the other way."
Longer term, he sees potential for a round of inflation with many of the world's major central banks continuing with ultra-loose monetary policy.
"There is going to be price to be paid for that, and it will be reflected in a higher gold price down the road," he said. "While gold may struggle for a couple of months or maybe even a couple of years, the way I look at it is we'll consolidate and make a move higher at some point."
Gold Pressured Overnight By Combination Of Factors
Earlier, gold had remained under pressure due to follow-through selling from Wednesday's decline, Flynn said. Gero also cited early margin-related selling. When traders receive margin calls, they must either put up more collateral to remain in a trade or exit a position.
Still other factors cited by traders included the recently strong tone in the dollar, at least prior to Thursday's economic data, and the record highs hit in the Dow Jones Industrial Average and S&P 500 so far this spring.
Nabavi also commented that some selling overnight was the result of news reports that some of the major hedge funds, including Soros Fund Management, cut their holdings of gold exchange-traded funds during the first quarter. "On the back of that, London came in and sold it quite aggressively all the way down to $1,370," Nabavi said.
Movement out of exchange-traded funds has been cited as one of the catalysts hurting gold since the start of the year. A quarterly demand trends report issued by the World Gold Council early Thursday showed total global gold demand fell in the first quarter mainly due to ETF outflows, even though buying of jewelry, bars and coins all rose.
Gold ETF holdings are down some 16% since the start of the year, Kurzatkowski said.
"Some traders had stockpiled gold during the financial crisis, and continued to add to their positions as the metal rallied," he said. "However, current economic conditions have failed to induce further panic. At the same time, lackluster growth has failed to inspire demand for the metal as an inflation hedge, despite central banks' best efforts to stimulate growth."
Further, the dollar index recently made an upside breakout, he added.