Gold futures bucked the trend of the broader market and jumped $38 or 2.5% on Thursday, the largest percentage increase since Oct. 25, 2011. The S&P 500 fell almost 2% while Euro Stoxx 50 and crude oil both dropped 1.5%. The US Dollar Index rose for 14 consecutive days.
The April FOMC minutes revealed that several Fed members were in favor of new actions should economic slowdown become big enough due to US fiscal contraction and European woes. Technically, gold has been in the oversold territory since May 8, prompting investors and traders to do some short-covering and buying on dips.
News out of Europe continues to be worrisome. Moody's has just downgraded 16 Spanish banks after it cut the ratings of six European countries including Spain and Italy on Feb. 13. Fitch also cut Greece's long-term credit rating from B- to CCC. The ECB said that it would temporarily halt lending to several Greek banks to lower risk. Ten-year Spanish bond yield reached 6.31% on Thursday, a rise of almost 60bp since May 6. Spain is clearly bearing most of the pressure from Greece's political paralysis and the uncertainty of its Euro membership.
The economic news out of the US and China also disappoints. The Philly Fed Manufacturing Index surprisingly dropped to minus 5.8 in April compared to a median forecast of 10. China's April industrial production increased only 9.3% year-over-year. The last single-digit increase happened in May 2009. To increase liquidity, the Chinese government lowered banks' reserve requirement by 50bp on 13 May.
The World Gold Council (WGC) reported that China, central banks and ETFs buttressed the demand for gold in Q1 2012. Gold demand fell 6% year-over-year to 1,097.6 tonnes while the average gold price was up 22%. However, China's investment and jewelry demand rose 10% in Q1. Chinese jewelry demand was again the world's largest, making up 30% of the world's consumption. Marcus Grubb, managing director of the WGC, still expects China to be the largest gold consumer this year. He also estimates central banks' purchase of gold to be close to 400 tonnes in 2012. In Japan, pension funds bought gold for their portfolios for the first time as gold is considered a good currency substitute.
Next week's events to watch include China's HSBC flash PMI index, Germany's IFO Index and the EU Summit with growth versus austerity and likely Greece at the top of its agenda.