FED'S POLICY STATMENTS – Predictable I feel?

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

Why did the financial world react in this manic-depressive way to a statement that was bland and predictable? Why do investors keep gambling vast sums of money in speculations on changes in monetary policy when Bernanke has tried to make crystal clear that significant changes are unlikely, at least until the end of the year? I think no one would have any clue with respect to these questions.

As always the effect on Gold is felt in a big way. Gold fell for a third straight session on Thursday after U.S. Federal Reserve Chairman Ben Bernanke hinted at reducing an $85 billion bond-buying programme, which has increased the precious metal’s appeal as a hedge against inflation. While Bernanke said the central bank needs to see further progress in the U.S. economy before the Fed scales back monetary stimulus, he also added that a decision to adjust it could come in the “next few meetings” if the economy looked set to maintain momentum. Down nearly 20 percent this year, gold could come under more selling pressure as investors increasingly price in a stimulus cut ahead of the Fed’s next policy meeting on June 18-19.

But Gold markets did manage to regain some composure yesterday. We saw a steady climb towards the $1,400/oz level until the US market opened. Some profit-taking took the US market lower, although a recovery soon took the price to a relatively stable trading range, just above $1,390/oz. The stability continued during Asian trading, with the price remaining in a very tight band of around $1,390/oz to $1,395/oz.

As pointed out earlier, I do feel that more upside for gold is in the offing. Even taking a slowing of Fed quantitative easing into account, we still feel that the environment remains supportive of a higher gold price—global liquidity should continue to grow, although maybe at a slower pace, and real long-term interest rates across the globe look set to remain low for some time still. Nevertheless, I cannot discount the investor apathy towards the metal and acknowledge that it will take some doing to restore confidence. Consequently, while I do still foresee upside for gold, these gains will most likely be hard won. The first challenge will be to push strongly past the $1,400/oz hurdle.

Physical demand remains strong in the major Gold consuming countries, where China has seen a daily increase in physical trading volumes. How tight the physical market still is, is reflected in the premium of 50 USD still paid today in Shanghai over the international price. Premiums in India started to cool off, as the weaker Rupee drove local Gold prices up and some Gold has restarted to be imported into the country, however rather sluggishly. Top gold buyer India, which had seen gold imports jump 138 percent in April, is facing a slowdown as the peak wedding season comes to an end and its central bank imposes new rules to reduce a deficit. 

There is no doubt gold is still one of the attractive assets at present as economic uncertainty is not over across the developed world. Federal Reserve has created money, but that money has not been circulated into economy as banks are still tentative to flood the market with easy money. Economists are apprehensive that when this money will be circulated, inflation may trigger in a big way. But that theory will be tested when the actual event happens.

The Fed will probably want to see six months of strong employment and at least two quarters of 3 percent gross domestic product growth before it seriously considers tightening. In the meantime, big market reactions to comments from the Fed chairman, like those Wednesday, will mostly be reversed – expensively for those investors who replace analysis with wishful thinking.

In short, there are still reasons to buy gold; there are reasons to hold gold; there are reasons not to go aggressive in investment. So, my gold may remain in a range ($1325-1550/oz) till September (German Election may be the next trigger).

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

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