Gold futures rebound as decline to seven-week low seen spurring Chinese demand

Gold futures snapped two days of declines after prices dropped to the lowest level in seven weeks, encouraging some investors to buy the precious metal amid signs of increasing demand in China, the worlds biggest consumer. Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, were reduced yesterday to the weakest level in almost a month.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in June traded at $1 284.60 an ounce by 06:48 GMT, adding 0.36% for the day. Prices shifted in a tight daily range between $1 284.80 an ounce and $1 280.90 an ounce. Yesterday, gold prices touched $1 278.10 an ounce, the weakest level since February 11.

Bullion has lost 3.1% in March as the US economy expanded at a faster-than-expected pace and after Federal Reserve Chair Janet Yellen said the central bank’s bond-buying program may be brought to an end this fall, with borrowing costs starting to rise by mid-2015. The Federal Reserve trimmed its monthly bond-buying program by $10 billion at the last three meetings.

However, the precious metal rose 7 percent in the first quarter as demand for haven assets was boosted amid a rout in emerging markets and Russia’s annexation of Crimea, which left Russia and the West involved in their worst conflict since the end of the Cold War.

“There is some buying interest below $1,300 but the upward momentum is weak,” Xia Yingying, an analyst at Nanhua Futures Co., said from Hangzhou, cited by Bloomberg. “Prices are likely to stay in range before the U.S. jobs data and very short-term support can be found at the 100-day moving average.” Gold’s 100-day moving average is around $1,272, data compiled by Bloomberg revealed.

Chinese demand

On the Shanghai Gold Exchange, trading volumes for spot bullion of 99.99 percent purity rebounded yesterday from the weakest level in two months registered on March 31st and traded at a discount of 17 cents an ounce to the London price.

According to data by the World Gold Council, China overtook India as the largest global consumer of the precious metal last year, consuming a record 1 066 tons.

Fed stimulus outlook

Gold prices were pressured after a report by the Institute for Supply Management showed its manufacturing index rose to 53.7 last month, from 53.2 in February. The increase, however was smaller than expected, as analysts predicted the index will reach 54.0 in March. The ISM manufacturing index covers 18 industries, most of which reported expansion in March, led by the petroleum sector.

ISM’s gauge of new orders in the US also jumped, reaching 55.1 in March from 54.5 in the preceding month. The index of orders waiting to be executed surged to 57.5 last month from 52.0 in February, the strongest since April 2011.

However, bullion drew support after Federal Reserve Chair Janet Yellen said on March 31 at a conference in Chicago that the central bank needed to do more to fight against unemployment, because keeping interest rates near zero for more than five years and swelling its balance sheet with asset purchases seemed not to be enough. She also added that the US economy still needed monetary stimulus for “some time” and that most of the Fed officials shared the same opinion.

Market players deemed Yellen’s comments as rather dovish, as she signaled the central bank will press on with trimming stimulus, but at the same time, the Fed will not be in a hurry to raise borrowing costs.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETP, were reduced to 810.98 metric tons yesterday, the weakest level since March 7. Holdings in the fund are up approximately 1% this year after it lost 41% of its assets in 2013 that wiped almost $42 billion in value. A total of 553 tons has been withdrawn last year.