Gold Prices Rise Further On Softer U.S. Economic Data

Higher gold prices enticed speculators back into the futures markets and speculative investors in gold Bullion; building on gains posted for the second week in a row, added to their net long positions, the latest CFTC report showed.

Speculators' net-long gold positions rose 44% in two weeks and data also showed hefty inflows into gold ETFs in August, taking holdings to record highs. Managed money accounts continued to add to their net long position in gold, adding 16,577 gross longs versus cutting 4,486 gross shorts, lifting the net long position to 131,687 contracts.

Speculative traders in silver futures increased their net long to 25,527 contracts. A new round of QE – Quantitative Easing to buy government bonds to keep long-term interest rates low — has ignited fears of inflation further down the road. The first two rounds of U.S. Quantitative Easing have doubled gold prices in the last four years.

Gold Bullion rallied to $1,700 per ounce, a level not seen in almost six months, after data showed US manufacturing slowed in August. But gold eased back after hitting technical resistance as it approached $1,702 and also as the euro slipped against the US dollar.

Comex Gold futures for December delivery settled up $8.4 at $1,696 per ounce, with volume just 10% below the 30- and 250-day average, preliminary Reuters data showed. Gold market trading activity had slowed last week ahead of the U.S. Labor Day holiday weekend. U.S. manufacturing shrank at its sharpest rate in more than three years in August and U.S. construction spending fell in July by the most in a year, according to two sets of data, reported Bloomberg.

In the U.S. government report on August employment, the median forecast of economists polled by Reuters is for a gain of 120,000 jobs, down from 163,000 in July. Employment is as important as growth, so the numbers on Friday will most likely sway the Fed ahead of their own meeting slated for the 12-13 September, when the Fed meets to discuss monetary policy.

Potential Lack Of Fiscal Action From ECB Or US Fed Keeps Gold Prices In Check Yet:

A point of concern for the short-term is that gold prices relative strength index (RSI) was at 73 on Tuesday, it’s highest since early February. Silver prices seems more in the overbought territory based on an RSI reading of 80, after gaining nearly 10% in the last two weeks and over 15% from end of July. A level above 70 typically indicates overbought territory, and some profits booking may bring about some corrections. Aside from technical resistance, a weaker euro against the dollar prevents gold’s break above $1,700 as investor caution mounts ahead of the ECB meeting tomorrow.

Policymakers are expected to announce a bond-buying plan to help lower Spanish and Italian borrowing costs, but some traders have questioned whether the bank will deliver on its pledge to bail out debt-laden eurozone countries. All the promises by the ECB and the US Fed need to turn into concrete action, as gold needs a major liquidity boost to keep rising, or balance sheet expansion, and for (bond) yields to stay low.

In theory, gold benefits from low borrowing rates because this cuts the so-called opportunity cost, the premium investors forfeit by owning gold rather than a yield- or dividend-bearing asset — of investing in this market. Most of the rise in gold since 2008 has been dependant on the US Fed’s actions and have already attracted record investment in Gold Bullion ever since. Much of the same will again depend on what steps the Fed takes until the end of the year. The Fed believes the risk of inflation has been mitigated in the near term; allowing further intervention.

The ECB Angle For Gold Prices:

At the ECB meeting on Thursday, markets expect President Mario Draghi to add concrete details to his pledge in late July to do whatever it takes to preserve the euro. A fresh EU monetary stimulus plan would be bullish for the Equity and Commodity Markets, at least initially. Expectation about concrete action was reinforced on Monday when Draghi said central bank purchases of sovereign bonds of up to three years maturity did not constitute state aid.

The ECB said at its last meeting that it would consider buying the government bonds of the more indebted big economies, such as Spain and Italy, to stem the spread of the debt crisis and avoid another full-scale sovereign bailout, following those of Greece, Ireland, Portugal and Cyprus. The prospect of support for the euro from the ECB has helped in maintaining some kind of support for the euro.

Gold prices tend to weaken when euro falls against the U.S. dollar. Gold prices in euros touched fresh highs for 2012 this week at 1,346.91 euros an ounce, putting it less than 2% below last year’s record high at 1,373.92 euros.

MCX Gold Prices In India Seem Vulnerable To Potential Volatility:

MCX Gold prices have shot up today to a new record of Rs. 31,525 for October contracts from its previous close of Rs. 31,449. The INR – Indian rupee has been underperforming for over a year now and has depreciated over 17-20% against the US dollar. MCX Gold prices have seen a steady rise even when Gold prices have been on a decline in the International Markets due to the heavy depreciation of the INR/USD.

To give you an idea of the huge gold prices difference due to the INR movements, let me remind of the fact that MCX gold prices were around Rs. 28.200 (INR was around 46/USD), when Comex Gold prices hit a life time high of $1925 last year. Gold prices have steadily declined in the international markets ever since and touched a low of $1530 earlier this year. But in the same current timeframe that gold prices have shot up further in India due to the 17-20% decline in the INR valuation/the US dollar, and is seen trading at Rs. 31,525, which is almost 12% higher from the time Comex Gold prices hit a lifetime high of $1925 last year (when the INR was around 46/USD). Gold prices in the international markets are yet 12% lower from their lifetime high.

Gold prices in India seem poised to face a very high volatility period, taking into consideration the expected Monetary Infusions by the ECB and the US Fed any time now. These infusions, be it from the ECB or the US Fed, will potentially weaken the US dollar and simultaneously strengthen the euro.

Comex gold prices will rise sharply on the same but the weakening US dollar may strengthen the INR at the same time and in return weaken MCX gold prices (in India). The Indian rupee is yet trading around 56 per US dollar, a tad higher from the 58.4 lifetime low, seen a few months ago and has huge potential for corrections.

Silver Futures Have More Volatility Potential Than Gold Prices:

September is generally a month of strong performance for the gold prices. On average, over the last 44 years, gold has gained 2.1% in September, compared with March, historically the weakest month based on percentage gains, where it has averaged a loss of 0.5%. Speculative holdings of Comex Silver Futures in August staged their largest monthly increase since September 2009, according to data from the CFTC – Commodity Futures Trading Commission last week.

Silver prices could receive additional buoyancy from investment demand above all, both from silver ETF investors and money managers. Climbing silver prices helped Shanghai silver futures hit record high near $34 an ounce or 7000 yuan a kilogram on Tuesday.

In early trade on Tuesday, the most-active Shanghai silver futures contract rose to a record high of 6,932 yuan a kilogram, tracking gains in prices in the global market. Analysts said launch of silver futures trading on the SHFE will help silver-related companies in China hedge against silver fluctuations in the world market, give China more sway in determining global silver prices, and offer another investment option for the nation’s small investors. China’s high trading volume and booming demand for silver helped to boost silver futures trading in the country.

SA Violence Could Support High Gold Prices:

South African mining violence has spread to Johannesburg, with police and security guards firing rubber bullets and tear gas at sacked gold miners who have been blocking colleagues from working, officials and police said. The clash at the Gold Fields mine east of Johannesburg, reported by police and Neal Froneman, the CEO of Gold One International, which runs the mine, was the latest violence to hit South Africa’s mines in months of unrest. Sven Lunsche, the company spokesman, said some 12,000 of Gold Fields’ workers “continue to engage in an unlawful and unprotected strike” that began on Wednesday.