DEBATE OVER FED QE MEASURES RAISES CONCERN FOR GOLD

-By Mr. Prithviraj Kothari, MD, RSBL (RiddiSiddhi Bullions Ltd.)

Spot gold fell as low as $1,420.60 an ounce and was last down 1.4 percent at $1,437 an ounce on Friday.

Throughout the week gold seemed consolidated in a narrow range and on Friday the prices slid. A strong USD performance against major currencies, took the wind out of the sails of Gold yesterday.

There were lot of news making rounds on the last two days of the week. Majorly, the news came in from the US, showing signs of US economic growth. Weekly data showed that US layoffs fell to pre recession levels for the first time. Fed official had made an announcement earlier that a strong labour market will compel them to roll back easy money measures. This created nervousness amongst investors who now worry that if Fed curtails its bond buying programs then gold will decline even further.

Gold is always considered as a safe haven asset and investors purchase gold to guard against the perceived risk of a weaker dollar and higher inflation. But when the economy recovers investors shy away from the yellow metal and move focus to riskier assets like equities that are tend to give better returns in a recovering economy. Gold is priced in dollars and becomes more expensive for foreign buyers when the dollar strengthens against other currencies.

The Fed's quantitative easing measures have always been a major support to bullion in recent years and any such measure by the Fed of curtailing its policies will boost the appeal of stocks at the expense of gold.

Gold price direction next week is likely to be influence by the strength of the U.S. dollar, along with U.S. economic data. Another, Interesting news that will be the released, is of 13-F filings in the US next week on May 15, where institutional investors will report their holdings at the end of Q1 and market participants are keen to see whether prominent investor Paulson and others had reduced Gold holdings.

If the reports and economic indicators turn out to be balanced and better than expected the gold will decline further but if the data comes out lower than anticipated then it would push gold prices further.

Nonetheless the main topic for debate remains that what the Federal Reserve will do with its quantitative easing measures.

Meanwhile on the domestic front, there was surprising news for the bullion market. RBI (Reserve bank of India) made an announcement that banks can import gold only to meet the genuine needs of exporters of gold jewellery. The central bank also restricted the facility of loans against gold coins per customer to gold coins weighing up to 50 gm.

This move was taken mainly to curb the import of gold. But, I don't think that the new announcement by RBI will have much an impact on the prices or demand for the yellow metal. Imports too are not expected to decline too much.

In fact or focus now will be on the monsoons. If there will be an average rainfall then import would be around 800 tonnes. The reason behind this is the demand for gold that comes from rural areas. Around 60 per cent of gold demand is from rural areas. So an average monsoon will reduce their purchasing power and thus affect the demand for gold.

On the other hand a good monsoon can push up the import figures above 1000 tonnes.

In case that happens then prices are tend to go upward.

In the next 6 months gold is expected to move in the range of Rs. 25000 - Rs. 30000 in the domestic markets

“The primary purpose of this blog by Prithviraj Kothari - MD, RSBL, is to educate the masses of the current happenings in the Bullion world.”


- Previous blog - "Gold on Life support"
http://riddisiddhibullionsltd.blogspot.in/2013/05/gold-on-life-support.html