Gold Recovered Further as Chinese Inflation Data Triggered Inflation Hedge

Gold price continued to recover on Tuesday with the benchmark Comex contract rising to as high as 1258. While the overall picture remains benign, China's headline CPI in June has raised the need for inflation hedge. Headline inflation rose to +2.7% y/y in June, up from +2.1% a month ago. The reading on monthly basis stayed flat, indicating the improvement from a year ago was driven mainly by the price weakness last year. The low non-food inflation signaled that the output gap continued to grow.

Yet, more banks have revised lower their forecasts for the yellow metal. Scotia Capital cut its gold price forecasts for this year to US$ 1400/oz from US$ 1550 and 2014 to US$ 1300 from US$ 1700. With strength in the US dollar and improvement in global economic outlook, the yellow metal's appeal as the safe haven asset has dropped. According to Scotia Capital, gold's development is reminiscent of "a period similar to the 1970s when the gold price is expected to pause and the next move upward will be driven by inflationary expectations”. Meanwhile, "mine output is forecast to slow down and decline longer term. This is due to lower grades being mined coupled with the deferral of the projects”. Meanwhile, silver price is expected to drop to US$ 23.5 from previous projection of US$ 27 in 2013, before falling further to US$ 21 (previous: US$ 31) in 2014.

This was in contrast with Deutsche Bank's more bullish view. The bank believed that "major part of the gold price correction has already occurred". Moreover, it stated that "the extent of the price correction today is still some way short of the percentage declines that occurred in 1980-1” It, however, has classified "events over 30 years as significantly different since at that time, US short-term interest rates rose to 20% with real interest rates also rising rapidly".

On the dataflow, UK's industrial production stayed slat m/m in May, down from +0.1% in April and market expectations of +0.2%. Manufacturing production contracted -2.9% y/y in May, deteriorating from a downwardly revised -0.9% drop a month ago. Consensus forecast was a -1.5% decline. Visible trade deficit widened more than expected to 8.5B pound in May from 8.2B in April. Later today, Canada would report housing starts which probably slipped -5.09% to 190K in June.

#source