Gold remains bullish, ends week higher

New York (Feb 22)   Although gold prices retreated somewhat from its multi-month high seen on Tuesday, bullion is still slightly higher over the week. Gains are being capped by the Federal Reserve's (Fed) plans to continue scaling back its monetary stimulus program.

Gold prices jumped to $1,332.80 per ounce, their highest since October, also its weekly high. Bullion retreated somewhat on Thursday, on weak Chinese manufacturing data, raising concerns that physical demand from Asia is deteriorating. Gold rebounded on Friday to close the week 0.52% higher at $1,323.80, which compares to the previous week's close of $1,318.60 per ounce.

The main reasons behind gold's recent strengthening is the weaker dollar, speculative buying and lower outflows from gold exchange trade funds (ETFs). Holdings in the largest gold-backed ETF, the SPDR Gold Trust, stood at 795.61 tonnes on Thursday.

Last year, investors took some 900 tonnes of gold out of ETFs and contributed significantly to the near-30% slump in prices. So far in 2014, gold increased nearly 10%.

Weak China data

Weak Chinese manufacturing data from Thursday signaled a possible slowdown in this emerging economy. The HSBC manufacturing Purchasing Managers' Index fell to 48.3 in February compared to 49.5 in January. The results were disappointing as analysts had expected the index to reach 49.5.

However, strong physical demand from China in particular should continue to support the price of gold in the medium term. The January figures from Hong Kong's Statistics Department on gold trade with China, due out next week, should confirm high Chinese buying interest.

FOMC minutes signal ongoing tapering

The minutes from the January Federal Open Market Committee (FOMC) meeting showed the committee unanimously voted to reduce the amount of its monthly bond-buying program by another $10 billion to $65 billion a month.

The bottom line at the last meeting was that "there should be a clear presumption in favor of continuing to reduce the pace of purchases by a total of $10 billion at each FOMC meeting."

According to the minutes, the FOMC decided to change its forward guidance as the unemployment rate approaches its 6.5% threshold.

Fed officials said emerging-market turmoil could pose a risk to the US economy but the knock-on effects of recent developments, notably on the jobs market, were likely to be modest.

Moreover, Fed's intention to maintain its $10-billion tapering pace at its upcoming meetings will deepen the risk aversion to emerging currencies and will most likely add to the safe haven's strength.

Markets saw a slump in emerging market currencies one month ago, which was in part caused by the US tapering its monetary easing program and in part by China's slowdown.

Source:  wbponline