Commodities trading outlook: gold falls on strong dollar, copper drops on downbeat manufacturing data

Gold fell on Thursday, pressured by a stronger dollar, as Fed minutes revealed policymakers feared weakening inflation, while also signaling optimism about the US economic recovery. Copper declined as disappointing manufacturing data from Europe and China spurred concerns about demand for the metal used in wiring and construction. Silver and palladium fell, while platinum was little changed.

Comex gold for delivery in December slid 0.14% to $1 192.2 per troy ounce by 12:34 GMT, having shifted in a daily range of $1 196.6-$1 176.2 an ounce. The precious metal slid 0.27% on Wednesday to $1 193.9 and is up 0.6% for the week.

The precious metal fell after hovering near the $1 200 level for a few days as the US dollar gained ground. Minutes from Fed’s October 28-29 meeting showed yesterday that some policy makers remained cautious about the possibility of prices not rising fast enough, even though key labor market gauges are showing a robust improvement. Muted inflation tends to hurt demand for gold as a hedge against inflationary pressures.

A record of the meeting showed that many participants observed the committee “should remain attentive to evidence of a possible downward shift in longer-term inflation expectations. Some of them noted that if such an outcome occurred, it would be even more worrisome if growth faltered.”

Optimisim

However, FOMC members also expressed their optimism about the US economy’s recovery, further supporting the US dollar and pressuring down the metal. Policy makers held a wide-range debate on whether to keep a pledge to keep interest rates at rock bottom for “considerable time” and emphasized that raising borrowing costs would depend on economic data.

The US dollar index for settlement in December traded at 87.750 at 12:32 GMT, up 0.04% on the day, having shifted in a daily range of 88.010-87.635. The US currency gauge added 0.08% on Wednesday to settle at 87.711. The contract surged to 88.365 on November 14th, the highest since June 2010.

Market players eyed key economic data from the US later on Thursday to gauge economic prospects and the strength of the dollar.

The Labor Department is expected to report at 13:30 GMT that consumer prices fell in October from a month earlier. The report is likely to show a 0.1% deflation on a monthly basis, while the CPI index probably slowed down to an annualized 1.6% last month, compared to 1.7% in September. Also due later today are initial jobless claims, existing home sales, Markit Economics’ Manufacturing PMI, as well as manufacturing activity in the region of Philadelphia.

Reflecting grim investor sentiment toward the precious metal, assets in the SPDR Gold Trust, the biggest bullion-backed ETF, fell to 720.91 tons on Wednesday, close to last Thursday’s 720.62 tons, which was the lowest since September 2008.

Swiss poll

Also weighing on the yellow metal, an opinion poll showed that support for a Swiss referendum to change the Swiss National Bank’s gold policy fell to 38% from 44% in October. Under the proposal, the central bank would be banned from selling its gold reserves and should back at least 20% of its assets with the metal, up from 7.8% in October. If the vote were to be positive, this would drive physical demand for the precious metal, boosting prices up. The vote will be carried on November 30th.

Copper

Copper fell following disappointing manufacturing data from Europe and China.

Comex copper for delivery in December slid 1.40% to $3.0025 per pound by 12:34 GMT, having shifted in a daily range of $3.0385-$3.0010. The industrial metal rose 1.43% to $3.0450 on Wednesday, ending two days of losses. Prices are down 1.4% so far this week.

Worse-than-expected manufacturing activity in China, the worlds top consumer of the metal, fanned negative sentiment. Preliminary private data showed that China’s manufacturing sector was at the threshold between expansion and contraction.

The corresponding HSBC Flash China Manufacturing PMI fell to a six-month low of 50.0 in November, compared to October’s final reading of 50.4, underperforming projections for 50.3. The output sub-index declined to a seven-month low of 49.5, entering contraction territory, compared to 50.7 in October. New orders increased at a faster rate, but unemployment also increased, at a faster rate, while export orders rose, but at a slower rate.

Hongbin Qu, Chief Economist, China & CoHead of Asian Economic Research at HSBC commented on the report: “Disinflationary pressures remain strong and the labour market showed further signs of weakening. Weak price pressures and low capacity utilization point to insufficient demand in the economy. Furthermore, we still see uncertainties in the months ahead from the property market and on the export front. We think growth still faces significant downward pressures, and more monetary and fiscal easing measures should be deployed.”

In Europe, manufacturing activity growth in powerhouse Germany stalled in November, with the corresponding preliminary Manufacturing PMI falling to 50.0, defying analysts projections for a jump to 51.5 from 51.4 in October.

Factory output in France also disappointed, contracting at a worse-than-expected pace. The preliminary French Manufacturing PMI, prepared by Markit Economics, slid to 47.6 from 48.5 in October, whereas analysts had projected a jump to 48.9.

In the Eurozone as a whole, the manufacturing and services sectors also grew less than expected, with the flash Composite Purchasing Managers Index sliding to a 16-month low of 51.4 from 52.1 in the previous month.

Chris Williamson, Chief Economist at Markit, commented on the report: “A fall in the eurozone PMI to a 16-month low raises the risk of the region slipping back into a renewed downturn. The single currency area is struggling to eke out any growth, with the PMI indicating that GDP is likely to have risen by just 0.1-0.2% in the fourth quarter. A drop in new orders for the first time in almost one-and-a-half years, albeit only very marginal, suggests growth could slow further in December.”

Losses, however, were checked amid hopes of fresh stimulus measures in Europe, China and Japan, which would heighten appetite for riskier assets and allegedly spur economic growth.

The market received a heavy blow earlier in the week as Japan unexpectedly slid into recession after a second consecutive growth of economic contraction in the three months through September. However, Prime Minister Shinzo Abes call for snap elections to test voters support for his package of economic reforms fueled hopes of additional stimulus measures.