(By Mani) Gold still remains frustratingly deadlocked in its trading range as the physical demand out of Europe has dried up, and Indian buying has trailed off again.
However, weaker economic data from China provided the necessary impetus to the yellow metal on Friday. The manufacturing data and bank-lending figures in the World's second largest economy was weak, implying that the policymakers may press the quantitative easing button there. Gold futures rose 0.24 percent to $1,624.20 in the afternoon trading on Friday.
"Trading activity is currently limited to very short-term strategies, usually intraday. We are starting to see more stops on either side of the recent range, indicating that a break either side is quite possible. Elsewhere, the industrial metals were similarly tied to subdued ranges," UBS strategist Edel Tully wrote in a note to clients.
Meanwhile, higher food prices in the US is viewed as a potential positive catalyst for gold as inflation concerns started to grow amid record high corn prices. The U.S. Department of Agriculture (USDA) said the USDA now expects corn prices to hit a record high this season of $7.50 to $8.90 per bushel, up from its July forecast of $5.40 to $6.40 per bushel.
In addition, rising prices in Asia bodes well for gold.
"Our colleagues in economics now expect Asian food inflation to start rising by year-end. This is not just the impact of the US drought, but the Indian monsoon remains deficient versus average, official Russian estimates for grain have been revised lower due to dry weather and this is also a factor impacting Australian output," Tully said.
Falling rice prices in Asia will limit some of the upside, but the risk is that Asian food inflation will rise coming into year-end and 2013 if current conditions do not change. For gold, this could be a driver for higher metal prices.
However, the impact varies from region to region. For India, a current poor monsoon season is negative for gold consumption. While higher food inflation may well prompt higher income earners to turn to gold, there is also the risk that, in the same environment, a poor crop output could force rural physical holders to sell part of gold holdings.
"The biggest upside impact for gold would arrive from China, with higher inflation expectations having the potential to feed into greater gold purchases. Traditionally too, Chinese demand-based on SGE volumes- is typically stronger in the Sept-Dec period than during the summer months," Tully said.
In the week to Aug 9, gold ETF holdings advanced 0.42 million ounces (moz) to 81.59moz. Investors extended their holdings in the GBS (LSE) fund by 119.28 thousand ounces (koz), the SPDR fund by 97koz and ETFS (LSE) fund by 87.77koz. In addition, holdings of iShares trust and Julius Baer fund were up 22koz each and Source fund holdings gained 76.69koz.
Meanwhile, investors liquidated 19.86koz of their holdings from ETFS (NYSE) fund. So far in the month of August global ETF holdings are up 0.45moz. The rolling monthly change turned positive, currently at 0.11moz from negative 0.49moz the previous week.