Gold futures off 6-month lows on increased Chinese demand

Gold advanced on Friday, after hitting the lowest in six months yesterday. Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, were further reduced and remained at the lowest since January 2009, adding to bearish sentiment. A stronger US dollar put more pressure on the yellow metal. However, robust physical demand from China amid a slump in prices supported the market.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in February rose by 0.12% at $1 195.00 per troy ounce by 09:33 GMT. On Thursday, prices touched $1 186.50 per troy ounce, the lowest since June 28th, when the metal bottomed at $1 180.35 per troy ounce. The contract swung between day’s high and low of $1 196.70 and $1 190.10 an ounce respectively. The precious metal settled last week 0.8% higher, after declining 1.8% in the preceding 5-day period. Last month, gold plunged 5.5 percent, the most since June and the biggest drop in November since 1978.

The precious metal has fallen 28% so far this year, the steepest annual drop since 1981, and is heading for the first annual decline in 13 years as investors lost faith in it as a store of value amid a rally in U.S. equities to a record and muted inflation.

“The region below $1,200 is where buying may be seen, especially from the jewelry sector and other industrial users. There’s still a potential for gold to go lower as the market expects further curbs on the QE.” said David Lennox, an analyst at Fat Prophets in Sydney, cited by Bloomberg.

US economy outlook

Gold was pressured after Fed’s decision to reduce its monthly bond purchases reinforced speculations that the US economy fares well and its recovery seems sustainable, reducing demand for the yellow metal.

However, actual recovery of the US labor and housing market remained questionable, after a number of US reports were released yesterday.

The US Department of Labor reported on Thursday an unexpected increase in the number of people who filed for initial unemployment benefits last week. Initial Jobless Claims surged to 379 000 in the week ended December 14th, defying projections for a drop to 332 000 from the preceding period’s upward revised 369 000.

Meanwhile, the National Association of Realtors reported that home resales fell for a third straight month to a one-year low in November. Existing home sales slid to 4.9 million, trailing projections for a drop to 5.03 million from October’s 5.12 million used homes sold.

Fed’s balance sheet has swelled to almost $4 trillion as an attempt to revive the US labor market and put millions of unemployed Americans back to work. The central bank’s asset purchases will be divided between $40 billion in Treasuries and $35 billion in mortgage bonds, Bernanke said.

Market players are now awaiting a confirmation of the US third quarter growth, due later today. The final Q3 Gross Domestic Product is expected to stand at 3.6%, confirming the revised reading. Personal Consumption Expenditures are projected to have risen by an annualized 1.4% in the three months through September, while the core value will likely post at a 1.5% increase, matching the previous quarter.

The U.S. dollar index, which measures the greenback’s performance against a basket of six major peers, added 0.16% to trade at 80.90 by 09:31 GMT. The March contract held in a day’s range between 80.97 and 80.83. The U.S dollar index settled last week 0.06% lower, after declining 0.52% in the preceding 5-day period. Strengthening of the dollar makes commodities priced in it more expensive for foreign currency holders and limits their appeal as an alternative investment.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, were reduced to 808.72 tons on Thursday, the lowest since January 2009. The fund has not seen inflows in 1-1/2 months, hinting that a substantial increase in prices is unlikely.

Outflows have totaled nearly 494 tons this year. Billionaire hedge-fund manager John Paulson who holds the biggest stake in the SPDR Gold Trust told clients on November 20 that he wouldn’t invest more money in his gold fund because it isn’t clear when inflation will accelerate. US inflation is still well below the Fed target of 2.00%.

China demand

On the Shanghai Gold Exchange, the biggest Chinese spot bullion market, gold volumes for the benchmark cash contract rose to a 10-week high as the price decline lured investors.

According to data compiled by Bloomberg, the volume for bullion of 99.99% purity surged to 19 775 kilograms yesterday, the largest since October 8th, from 13 673 kilograms the previous day. The record-high was set on April 22nd, when the volume reached 43 272 kilograms.

China is the world’s second biggest importer, but is expected to overtake India as the world’s top bullion consumer, with demand poised to reach 1 000 tons this year, according to the World Gold Council.