Can Central Bank, Demand Turn Around the Weak Gold Sentiment?

After plunging 6.89 percent last week, the gold futures have dropped 1.31 percent in the past two days to finish at $1,275.10 on Tuesday. The prices fell to as low as $1,242.60 during Wednesday Asian morning. The Dollar Index continued to strengthen, rising 0.32 percent this week to 82.581 after surging 2 percent last week. The S&P 500 index and the Euro Stoxx 50 index retreated 0.28 percent and 0.24 percent respectively in the past two days. Both indices traded up over 1 percent on Tuesday.

Stronger U.S. Data and Calmer Tone from China
The world equity and bond markets have turned upside down after the Fed's tapering talk last week. The MSCI Developed Market Index has dropped 4.75 percent while the U.S. 10-year Treasuries have plunged 3.50 percent since 18 June. Gold was harder hit at 6.72 percent. In China, tight central bank's policy to control credit growth has led to the recent liquidity crunch among the Chinese banks, with the seven-day repo rate spiking to a two-year high of 11.2 percent on 20 June. On Tuesday, the Central Bank of China stated that it will stabilize the market rates and ease the tight liquidity. In the U.S., the May consumer confidence index surged to 81.4 compared to an expected 74.3. The April S&P/Case-Shiller housing index rose 12.1 percent year-over-year while the May existing home sales reached an annualized ate of 5.18 million, a three-and-a-half year high. A better-than-expected U.S. growth and easier liquidity conditions in China led to the rebounding of global equities prices on Tuesday and Wednesday.

Subdued Physical Demand Response So Far
The Indian and Chinese consumers have not rushed to buy gold this time. The Indian government has restricted banks to lend gold-backed loans in order to curb gold imports. The end of the wedding season in India has also weakened demand. The cash crunch among the Chinese banks, the slowing economy as well as the market volatility have dampened the gold demand in Hong Kong and China, causing people to wait-and-see. Premiums in gold bars in Hong Kong are around $2.50 an ounce compared to $6 in May. According to the CFTC, the hedge funds have cut their net positions by 2 percent across 18 commodities, and have reduced their net long positions in gold by 29 percent as of 18 June. Barclays commented that the recent price plunge below $1,300 will likely lead to more selling by investors who accumulated below this level. The Chinese demand in the near-term and other central bank's actions will be the key to the turnaround of the already very weak sentiment in gold prices