Gold futures soar to six-month high as China, Ukraine boost demand for haven assets

Gold futures soared to the strongest level in almost six months after speculation Chinas economic growth is losing momentum hurt equities, fueling demand for haven assets at a time when tension between Russia and Ukraine escalates. Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, were unchanged yesterday, holding at the highest level since December 20th.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in April surged by 0.8% to trade at $1 357.60 per troy ounce by 07:50 GMT. Prices touched a session high at $1 363.20 per troy ounce, the strongest since September 20, while day’s low was touched at $1 345.70 an ounce.

Bullion advanced 0.6% yesterday, extending a fifth weekly gain last week, as tension between Russia and Ukraine escalated, spurring demand for haven assets, including gold.

Gold futures are up 13% this year and capped the first back-to-back monthly increase in February since August, amid concern the economic growth of the largest bullion consumer, China, may slow, while unrest in Ukraine hurt emerging market assets already weakened by reductions in Fed stimulus, boosting demand for the precious metal as a store of value. The MSCI Asia Pacific Index of equities plunged 1.5% today, before data tomorrow forecast to reveal Chinese industrial production slowed its pace last month.

At the same time, the parliament of the southern Ukrainian region, Crimea voted yesterday that the Black Sea peninsula will declare itself an independent state if its residents approve a March 16 referendum on splitting from Ukraine and joining the Russian Federation as Western leaders threaten sanctions.

“Gold is getting support from geopolitical events and falling equity markets, but there’s little follow-through from physical buyers at these levels,” said Lv Jie, an analyst at Cinda Futures Co., a unit of one of four funds in China created to buy bad debt from banks, cited by Bloomberg. “Investors continue to watch U.S. economic data for direction.”

Chinese demand

On the Shanghai Gold Exchange, trading volumes for spot bullion of 99.99 percent purity have exceeded the fourth quarters daily average of about 11 525 kilograms every day since March 5th.

Higher bullion prices have hurt demand in China, which according to data by the World Gold Council released in February, overtook India as the largest global consumer last year, consuming a record 1 066 tons.

Fed stimulus outlook

Bullion prices were pressured earlier in the week after two Fed officials commented that the hurdle rate to alter the pace of Fed stimulus cuts was too high.

Fed President of Philadelphia Charles Plosser, who is a voting member this year, commented on Monaday that the recent batch of strong US economic data wasn’t enough to alter the pace of the central bank asset purchases. His statement was later echoed by Chicago Fed President Charles Evans, who will not vote on policy this year.

“Given the fact that we’ve embarked on measured reductions, it’s important to give some certainty or at least clarity to the markets on what we’re doing,” Plosser said in a Bloomberg interview. “It’s OK to continue at 10 billion. The hurdle rate for change is pretty high in either direction.”

Federal Reserve Chair Janet Yellen said last month that central bank’s officials were “open to reconsidering” the pace of reductions in monthly bond purchase, should the economy falter, in contrast with her comments made earlier in February, that US economy has gained enough strength in order to withstand reduction of monetary stimulus.

At the same time, Fed officials will try to determine whether the weakness economy has recently demonstrated is due to temporary factors, before their next policy meeting scheduled for March 18-19th.

The central bank announced in December that it will pare monthly bond-buying purchases by $10 billion, after which it decided on another reduction of the same size at the meeting on policy in January, underscoring that labor market indicators, which “were mixed but on balance showed further improvement”, while nation’s economic growth has “picked up in recent quarters.”

Federal Reserve will probably continue to pare stimulus by $10 billion at each policy meeting before exiting the program in December, according to a Bloomberg News survey of 41 economists, conducted on January 10th.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETP, were unchanged at 812.70 tons on Tuesday, the strongest level since December 20th. Holdings in the fund are 0.9% up this year after it has lost 41% of its assets in 2013, that wiped almost $42 billion in value. A total of 553 tons has been withdrawn last year. Billionaire hedge-fund manager John Paulson who holds the biggest stake in the SPDR Gold Trust told clients at the end of last year that he wouldn’t invest more money in his gold fund because it isn’t clear when inflation will accelerate. However, a government report revealed that the owner of the largest stake in the SPDR Gold Trust, kept his holdings unchanged in the fourth quarter of 2013.