Gold rallies to 3-1/2-month high on safe haven demand

Gold advanced on Monday to the strongest level since October, after downbeat US economic data fueled speculations the US economy may slow its growth, boosting demand for haven assets. Billionaire John Paulson, the owner of the largest stake in the SPDR Gold Trust, the biggest bullion-backed ETF, kept his holdings unchanged in the fourth quarter, a government report revealed. A weaker US dollar also fostered positive sentiment.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in April rose by 0.44% to trade at $1 324.40 per troy ounce by 08:08 GMT. Prices touched a session high at $1 329.90 per troy ounce, the strongest level since October 31, while day’s low was touched at $1 321.10 an ounce.

The yellow metal settled last 5-day period 4.1% higher, capping the biggest weekly gain since the period ended August 16. Gold futures are up 10% this year after a rout in emerging markets and signs of slowing US growth, boosted demand for haven assets.

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 and amid speculation Fed will continue scaling back its monetary stimulus throughout 2014. Billionaire hedge-fund manager John Paulson who holds the biggest stake in the SPDR Gold Trust told clients at the end of last year that he wouldn’t invest more money in his gold fund because it isn’t clear when inflation will accelerate.

Fed stimulus outlook

Few downbeat US reports spurred speculations that the economy may slow its growth, fueling demand for haven assets, such as gold.

A report by the Federal Reserve revealed on Friday that US factory production decreased in January by the most since May 2009, adding to signs that the recent severe weather conditions weighed on the US economy.

The index of industrial production, which gauges output in US manufacturing, utilities and mining sectors, decreased 0.3% in January compared to December, marking its first monthly drop since July 2013. Experts had anticipated that industrial production will expand 0.2% in January, after it increased 0.3% in December.

The capacity utilization rate in nation’s industry dropped 0.4% to 78.5% in January, while preliminary estimates pointed to a rate of 79.3%.

The US Department of Labor reported on Thursday that the number of people who filed for unemployment benefits for the first time unexpectedly increased to 339 000 in the week ended February 8, while analysts projected the number of initial jobless claims will decline to 330 000 from 331 000 in the previous week.

A separate report by the US Census Bureau, revealed the nation’s retail sales dropped by 0.4% in January, the most since June 2012 and after a downward revised 0.1% decrease in the previous month. Analysts had expected the retail sales index to remain flat in January. Retail sales are closely watched, because they provide crucial information regarding the tendency in consumer spending in the United States, which, on the other hand, accounts for about 70% of nation’s Gross Domestic Product.

Janet Yellen, in her first testimony to Congress as head of the Fed, said on February 11, the central bank will “likely reduce the pace of asset purchases in further measured steps at future meetings”, if the labor market continues to recover and inflation rises.

Yellen underscored “continuity” in the Federal reserve monetary policy, emphasizing that she strongly approves the approach of her predecessor, Ben Bernanke.

The Fed Chairman also reiterated that the pace of cutting back Fed stimulus was not on a “preset course” and the recovery in the labor market in the US is “far from complete”.

The central bank announced its decision to reduce monthly monetary stimulus by 10 billion USD to 65 billion USD at the meeting on policy in January, underscoring that labor market indicators, which “were mixed but on balance showed further improvement”, while nation’s economic growth has “picked up in recent quarters.” Fed policymakers are to hold their next meeting on March 18th-19th.

The Federal Reserve 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.

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 0.08% on Monday to trade at 80.11 by 07:49 GMT. Prices hit a session high at 80.16, while day’s low was touched at 79.99, the weakest level since December 27th. The contract settled last week 0.72% lower. 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, were decreased to 801.25 tons on Friday, but capped three weeks of advances, the longest run since August. The fund has lost 41% of its holdings in 2013. A total of 553 tons has been withdrawn last year.