Gold prices holding up despite disinflation as physical demand rises

After rising 3.5% in the first two days of the week, the U.S. Comex gold futures retreated 0.52% in the following two days to end at $1,225.60 on Thursday.

The futures rose 2.96% for the week after climbing 1.29% last week. The Dollar Index fell 0.75% for the week to 88.663 on Thursday. The crude oil futures have plunged 8.95% this week and 9.37% for the month to end at $59.75 on 11 December. The S&P 500 Index and the Euro Stoxx Index also fell 1.47% and 2.76% respectively for the week. The U.S. 10-year government bond yield and the ten-year German Bund yield both declined 10bp this week to 2.162% and 0.675% respectively on Thursday. However, the Greek three-year bond yield surged almost five percent this week to 10.7%.

Oil and the U.S. Growth
While the oil prices are falling to find a new equilibrium level to equate a lower demand and a higher supply, the U.S. data point towards further improvement. The retail sales rose 0.7% in November compared to 0.4% expected while the weekly initial jobless claims fell 3,000 to 294,000 compared to 297,000 expected. Disinflation and a stronger labour market both hurt gold prices as the former lowers the inflation expectations while the latter raises the fear that the Fed would tighten earlier than expected. 

Physical Demand and Positioning
Still, gold prices have held up well recently despite the lower inflation expectations because of the global equity market sell-off and the rise in physical demand. Bloomberg reported that the volumes in the gold benchmark contract in Shanghai rose to a three-week high while the SPDR Gold Trust holdings have risen eight metric tons from the recent trough to 725.75 tons. The managed money combined gold positions rose 20% to 79,497 contracts during the week ending 2 December, led by a fall of 16% in the short positions. 

What to Watch
We will watch the U.S. November industrial production on 15 December, the December flash manufacturing PMI for China, the Eurozone, and the U.S. November housing starts on 16 December, the Bank of England MPC Minutes, the FOMC rate decision, the Fed’s press conference, and the U.S. November inflation on 17 December, Germany’s December IFO business climate on 18 December as well as the Chicago Fed’s speech on 19 December.