Gold ‘tug of war’ between physical and paper buyers to continue, says Sharps Pixley

While investors in gold ETPs continue to rotate out, buyers of physical gold keep buying more, setting the market up for a continued struggle between those willing to buy physical stocks and those less willing to invest in gold backed securities, says precious metals broker Sharps Pixley.

Softer Economic News but Higher Stock Prices

While Japan’s Q1 real GDP, driven by higher private consumption, jumped a higher-than-expected 3.5%, the euro-area’s April inflation rate dropped to a three-year low to 1.2%t while the Q1 real GDP declined 0.2%, its sixth quarter of contraction. The weekly jobless claims in the U.S. increased by 32,000 to 360,000. The Philadelphia Fed index and the New York’s manufacturing survey also unexpectedly contracted as the fiscal cuts have taken effect. Nevertheless, about 39% of the stocks in the S&P 500 Index reached their 52-week high according to Bloomberg. The Japanese Nikkei Index is also approaching a five-year high. The strength of the stock markets has surprised many investors who are still under-allocated to equities and are skeptical of the economic future.

Gold-Backed ETP Holdings Continued to Drop

As inflation is low and equity markets are rising, gold-backed ETP investors have been rotating out of gold. The SPDR Gold Trust holdings dropped to a four-year low to 1,041 metric tons yesterday after reports show that investors such as Soros, Northern Trust and BlackRock have cut their holdings between 12% to more than 50% in Q1. Credit Suisse predicted that gold will trade at $1,100 next year, citing that gold is relatively expensive compared to other hard commodities. The World Gold Council reported that while gold-backed ETPs dropped 176.9 tonnes in Q1, total bar and coin demand surged 10% from a year ago to 377.7 tonnes while jewellery demand climbed 12% to 551 tonnes. Central Banks continued to add gold by over 100 tonnes for the seventh consecutive quarter. The tug of war between the physical buyers and the paper gold investors will likely continue.

What to Watch Next Week

Next week, various US regional Fed Presidents will speak about the economy on 20, 21 and 23 of May. On 22 May, Japan will announce its Target rate, Ben Bernanke will make his testimony and the latest US FOMC minutes will be released. The US, Euro-17 and China will release the flash manufacturing PMI index for May on 23 May. Germany will report its IFO business climate index on 24 May.

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