Gold futures extend yesterday’s gains amid increased Chinese demand and weaker dollar

Gold advanced amid speculations for increased Chinese demand and a weaker dollar. However, assets in the SPDR Gold Trust, the biggest bullion-backed ETF, remained for a second day at the lowest since January 2009, adding to bearish sentiment.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in February added 0.74% to trade at $1 243.30 per troy ounce by 08:58 GMT. Prices swung between day’s high and low of $1 247.20 and $1 237.40 an ounce respectively. Yesterday, the precious metal gained 0.86% and extended its weekly advance to 1.1% on Tuesday. Prices touched $1 211.10 per troy ounce on December 4th, the lowest since July 5th and closed the week 1.8% lower. Last month, gold plunged 5.5 percent, the most since June and the biggest drop in November since 1978.

The precious metal has fallen 26% so far this year and is heading for the first annual drop in 13 years as investors lost faith in the metal as a store of value amid a rally in U.S. equities to a record and muted inflation.

“We don’t think much will happen in the gold market between now and when the next Fed policy statement comes out. It remains to be seen how gold will react to the Fed clarifying its intentions. Some are arguing that most of the tapering has already been discounted”, said Edward Meir, an analyst at INTL FCStone, cited by Bloomberg.

Fed stimulus outlook

Yesterday, the President of the Fed Bank of St. Louis, who votes on policy this year, said that the gains in the labor market increased the odds of Fed tapering. His colleague, Richard Fisher, a President of the Fed Bank of Dallas added in a separate statement that the central bank should start trimming the bond buying program as early as feasible.

Comments came after much-better-than-expected US data was released on Friday. The Labor Department reported that unemployment in the U.S. fell to 7.0% in November, the lowest in five years, beating projections for a minor decline to 7.2% from October’s 7.3%. U.S. employers added more jobs last month than projected. Non-farm payrolls jumped to 203 000, confounding expectations for a retreat to 183 000 from October’s downward revised 200 000. The progress in the labor market will probably provide a spark for the US economy, analysts expected.

The FOMC’s October meeting minutes pointed that Federal Reserve officials may reduce their $85 billion in monthly bond purchases “in coming months” as the economy improves. Central bankers are set to reconvene on December 17-18th.

The market may be underestimating the probability “of a vote to taper” this month, and the dollar may have begun a multi-year bull market, Credit Suisse Group AG wrote in a December 4th report, cited by Bloomberg.

Last month, a survey by the same media revealed that the Fed will probably trim its asset purchases to $70 billion from $85 billion at its March 18-19th meeting.

Fed Reserve Bank of Atlanta President Dennis Lockhart said that any decision to taper should be accompanied by a limit on the size of the program or a timetable for ending it.

A weaker dollar supported the metal. The U.S. dollar index, which measures the greenback’s performance against a basket of six major peers, fell 0.06% to 80.12 by 08:45 GMT. The December contract held in a day’s range between 80.16 and 80.01, the lowest since October 31st. The U.S dollar index settled last week 0.52% lower after falling by 0.23% in the preceding two weeks. Weakening of the dollar makes commodities priced in it cheaper for foreign currency holders and boosts their appeal as an alternative investment.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, remained for a second day at 835.71 tons on Monday, the lowest since January 2009. Outflows have totaled nearly 470 tons this year. Billionaire hedge-fund manager John Paulson who holds the biggest stake in the SPDR Gold Trust told clients on November 20 that he wouldn’t invest more money in his gold fund because it isn’t clear when inflation will accelerate. US inflation is still well below the Fed target of 2.00%.

Chinese demand

Signs of increased China demand, supported the market. On the Shanghai Gold Exchange, volumes for bullion of 99.99 percent purity, the benchmark spot contract, increased to 14 063 kilograms yesterday, the highest since November 28th.

China is poised to overtake India as number one consumer of bullion by the end of the year, with demand set to reach 1 000 tons, according to estimates by the World Gold Council.