Gold touches 6-week high amid signs of increased demand

Gold increased to six-week high on Monday, as assets in the SPDR Gold Trust, the biggest bullion-backed ETF expanded the most since 2011, showing robust investors demand. A weaker US dollar and signs of increased physical demand from China also fanned positive sentiment.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in February rose by 0.18% to trade at $1 254.20 per troy ounce by 08:06 GMT. Prices touched a session high at $1 257.90, the strongest level since December 11th, while day’s low was touched at $1 253.10 an ounce.

Gold futures settled the 5-day period 0.45% higher, after adding 0.95% in the previous week. However, the precious metal settled last year 28% lower, the steepest annual decline since 1981 as investors lost faith in the metal as a store of value.

“Pre-Spring Festival demand in China is good and investors buying into ETFs aids sentiment,” said Wang Xiaoli, chief investment strategist at CITICS Futures Co., a unit of China’s biggest listed brokerage, cited by Bloomberg. The Lunar New Year or the Spring Festival, as it is also known, begins on January 31st.

Chinese demand

On the Shanghai Gold Exchange, the trading volume for bullion of 99.99 percent purity advanced for a second day on Friday and exceeded 13 000 kilograms every day last week, in comparison with daily average of 12 782 kilograms last year.

A report showed that deliveries by the Shanghai Gold Exchange to China almost doubled in 2013.

According to data by the World Gold Council, China probably overtook India as the largest global consumer in the previous year.

Fed stimulus outlook

Federal Reserve Bank President for Minneapolis, Narayana Kocherlakota, also a voting member on monetary policy this year, said Fed officials have to do more in order to stimulate the economy.

Narayana Kocherlakota’s comments provided some support to gold prices as investors are keeping a close eye on every single US economic indicator and comments from Fed officials to further gauge the size and the timing of Fed stimulus cuts.

Central bank’s policy makers said on December 18th that they will reduce monthly asset purchases to $75 billion from $85 billion, underscoring improving labor market conditions.

The central bank will probably continue to pare stimulus by $10 billion at each policy meeting before exiting the program in December, according to a Bloomberg News survey of 41 economists, conducted on January 10th. The Federal Open Market Committee is scheduled to meet next on January 28-29.

A series of overall upbeat data provided signs that US economic growth is accelerating and recovery seemed sustainable. US home construction slowed less than analysts had projected, while industrial output expanded for a fifth consecutive month. Only the consumer sentiment came at a lower-than-expected reading in January, but this was not enough to change the overall market consensus that Fed will continue tapering throughout 2014.

A report by the US Commerce Department on Friday, showed that housing starts decreased 9.8% to 999 000 annualized rate in December, after they have been revised to 1.11 million pace in the previous month, the strongest figure since November 2007. Analysts had expected that housing starts will decline to 985 000 in December. Building permits fell by 3% to a 986 000 pace.

Last year, builders began constructing 923 400 homes, which is 18.3% higher than a year ago and is the largest number since 2007, when 1.36 million houses were constructed.

At the same time, industrial production in the United States rose 0.3% in December on a monthly basis, in line with expectations, supported by overall recovery in manufacturing and mining sectors. On annual basis, industrial output expanded 3.7% in December, or 0.9% higher than the peak registered before the global recession. November’s result has been revised down to a 1.0% increase from 1.1% gain previously. In October and September, however, nation’s industrial production has been moderately revised up.

Gold drew some support, following the release of a worse-than-expected consumer sentiment data in January. January’s preliminary reading of the Thomson Reuters/University of Michigan consumer sentiment index registered at 80.4, defying analysts’ projections for an advance to 83.5 from December’s final reading of 82.5.

A weaker dollar also supported the yellow metal. The US dollar index, which measures the greenback’s performance against a basket of six major peers, fell by 0.08% on Monday to trade at 81.28 by 07:50 GMT. Prices shifted in a daily range between day’s high and low, 81.42 and 81.28. Weakening of the greenback makes dollar-denominated commodities cheaper for foreign currency holders and boosts their appeal as an alternative investment.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETP, surged by 0.9% on Friday, the largest daily increase since November 2011, to reach 797.05 tons. The fund has lost 41% of its holdings in 2013. A total of 553 tons has been withdrawn in 2013. 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.