(By Mani) Gold has been a good performer so far this month, trading through key technical levels, igniting stops, and attracting some momentum players. However, it might suggest that volumes have been particularly stellar, instead the opposite is the case.
Month-to-date volumes at Chicago Mercantile Exchange show that daily volumes average just 119,000 lots, versus a June average of 166,000 lots. Instead, a large portion of "typical" players still remain on the sidelines, unchanged from their stance for most of this year which contrasts greatly with their active participation in 2011.
"Last year, a similar move in gold as we've seen this month would have attracted a far greater number of buyers, but this time around more convincing is required before a bigger mass of players step in. This all means that potentially there are a host of buyers that could enter this market," UBS strategist Edel Tully wrote in a note to clients.
Gold remains well-positioned for a rally if the tide turns, and the gold's move could be sizeable. The significant challenge gold has is convincing investors to buy in; after all, gold hasn't been a stellar performer in 2012.
Some of that hesitancy stems from the fact that gold has been here before, trading up to a high of $1640 in June but ultimately giving back those gains. For sure, part of the broader risk move stems from policy expectations.
Although, another portion relates to markets enjoying a holiday from European stresses. With immediate risks out of Europe put to the sidelines for now, markets have had the opportunity to stage a risk rally.
Though, gold has been more closely tied to risk than a safe haven camp in recent weeks, there is little that is exclusive to gold in this move.
Europe may have slipped to the sidelines for now, but risks have only temporarily receded. The second quarter reporting season is starting on July 9. Corporate earnings for the second quarter are not expected to add any extra boosts to risk sentiment.
"The continued slowdown in GDP growth will likely impact both revenues and costs and profit growth in Q2 is expected to ease. The downward trend in earnings estimates is decelerating, but is still expected to continue as expectations remain too optimistic," Tully noted.
However, the fact that the global corporate sector has managed to retain its fundamental strength is somewhat reassuring for investors, but hardly offers anything upbeat. Instead, the risk of disappointment is rather high given recent profit warnings by companies.
Although, niggling worries persist, its not just dollar gold that has received a boost this month, euro gold is also on the march which perhaps provides greater evidence of the underlying strength in this move. So far in July, gold priced in euros is modestly outperforming gold priced in dollars.
"Although gold has not managed to attract safe-haven bids in a while, investors holding euros may find relative safety in the yellow metal given the potential for euro- negative headlines to weigh on the single currency at some point up ahead," Tully added.
On the physical front, while visible, demand from India has been quite sporadic this week, with relatively good days shortly followed by slack buying. Although, the rupee has managed to hold on to recent gains against the dollar for now, the seasonal aspect of Indian gold demand is likely at play here.
Gold priced in rupees is lingering at the lowest levels in nearly a month, but there is no great urgency to stock up at this stage. Further declines for gold in terms of rupee are needed to encourage more buying.
"With gold prices holding up so far this month and further rupee appreciation likely to be limited from here, the prospects for a sizeable increase in physical offtake from India are not overwhelming," Tully said.
Meanwhile, a positive U.S. jobs data may curtail the buying interests of gold investors, while the reality is that policy makers still have a lot of details to iron out and political hurdles to overcome in the months ahead. However, given recent market optimism investors may be inclined to see the glass as half full for now.