A week in gold: US debt deal sparks best week in months

SAN FRANCISCO (Oct 20)  Gold had its best week for months on the back of the settlement of the US debt crisis, rising by almost US$20 to US$1,316.

Australian broker Macquarie said the rally reflected significant short covering, with market participants positioned for a fall in the gold price after the US fiscal dispute was resolved.

On Thursday, the morning after the US compromise was agreed, the gold price jumped by 3% in ten minutes, with reports that orders worth more than US$2bn hit the screen.

Macquarie added that the focus in the gold market had also shifted to the damage the 16-day government shutdown had done to the US economy.

Economic data and surveys that have been released suggesting confidence has taken a hit, it said, while the temporary resolution appears only to have postponed the problem for three months.

As a result, the Australian broker does not expect the US Federal Reserve to start tapering its monetary policies until March 2014, a view it suggests is gaining ground.

One thing that has been absent from the recent rally has been the physical buying that helped the price recover from the slump in April.

HSBC sees this as only a temporary hiatus and it expects demand especially in Asia will continue to grow as people seek a hedge for inflation.

The broker notes that since 2008 demand for gold in India more than doubled, while consumption in China rose almost 350%. The two countries are the largest retail buyers of gold.

“With inflation still elevated in many markets and interest rates not offering adequate compensation, expect Asia’s voracious appetite for gold to persist,” HSBC economist Frederic Neuman said.

“In markets like India, Vietnam and China, consumers have few tools with which to protect their savings against rising prices.

“In recent years, rising inflation stoked demand for gold in a number of markets.”

Underlining the growth in demand for gold in emerging markets, Russia this week launched its first gold-backed exchange traded fund (ETF).

The Moscow stock exchange and investment group FinEx launched the ETF, which will track the London Gold Fixing Price.

Its launch comes as holders of existing gold-backed ETFs have been steadily reducing their holdings, a major contributor to gold’s 20% price fall this year.

SPDR Gold Trust, the largest of the gold-backed ETFs has seen more than 400 tonnes flow out this year. Holdings at 885 tonne are at a 4-1/2 year low and 35% below the peak of December 2012.

Broker VSA said it was not surprised by the move to establish a gold-backed ETF in Russia as the government has been a significant buyer of physical gold for central bank reserves over the past 18 months.

“This only confirms that there is a market of investors in Russia interested in holding and trading physical bullion," said VSA, though it does not expect the size of the ETF fund to be significantly material to the overall global gold ETF market.