Gold extends decline for a third day with the benchmark contract weakening to as low as 1176.7 in European session. Although suspension of funding talks between Hungary and IMF/EU reignited worries over sovereign crisis in European countries, deflationary pressures and economic slowdown weighed on demand for the yellow metal. Gold price has fallen -7% from the record high of 1266.5 made on June 21.
While gold's near-term outlook has turned bearish and further decline is inevitably, we remain bullish on its longer-term outlook as advanced economies, especially the US, the UK and the Eurozone, will likely keep their policy rates lower for longer. A generally low-rate environment should boost gold in the long-term.
The Central Bank of Russia reported that it added 200K oz to its gold reserves last month, increasing its stockpile to 22.8M oz. According to the World Gold Council, Russia's gold holdings ranked number 6 in June. The US ranked number 1 with total holdings at around 260M oz. Supply of gold from official sectors has dropped significantly over the past few years and it is likely that central banks will be net buyers, instead of sellers, of gold this year. Indeed, IMF is the only major official seller this year and is authorized to sell at the current rate of around 15 tons (482.3K oz) per month.
It's crucial that central banks have changed from net sellers to net buyers. From 1999 to 2008, central bank gold sales amounted to 3727 tons. On average, the official sector had been selling more than 400 tons of gold per year, representing 15-20% of total mine supply. We believe the change is positive for gold's long-term price outlook.
Crude continues to oscillate around 76-77 in European session as investors await s economic data and corporate earnings. European bourses plunged while US futures slid as earnings of IBM and Texas Instruments, large tech stocks, disappointed as revenues missed market expectations. Goldman Sachs Group and Johnson & Johnson will deliver results later today.
US housing starts probably slipped to 577K, the lowest level of the year, in June from 593K in the prior month. At the same time, building permits are expected to have dipped -4K to 570K. Housing activities have resumed weakness since May after the first-time buyer tax credit expired, suggesting recovery in the property sectors remains fragile and not sustainable.