HALF WAY THROUGH 2014...BUT WHERE IS GOLD HEADING FOR?

                                                     - Mr. Prithviraj Kothari, MD, RSBL              

We are half way through 2014 and the market is still confused whether gold is showing bullish trends or bearish. But lately, gold has been behaving in such a pattern that it would be difficult for anyone to give "a" particular market trend.


                                  

At the beginning of 2014 it was the exorbitant demand for gold from China that kept gold prices high. Then came in the deteriorating weather conditions in US and political uncertainty in the Euro Zone that kept pushing gold prices even higher. Come in March and the tables tuned for the yellow metal. Gold prices dropped over developing US economy and statement released by the Fed that they may end the massive bond buying program by the end of 2014. Then came in the Ukraine crisis which proved to be vital for gold. May was once again a bumpy ride for gold as it was pulled between the escalating tensions in Russia on one side and a positive US economy on the other.

Simmering geopolitical tensions over Ukraine and Iraq have boosted gold's safe-haven appeal so far this year. Still, analysts are bearish on gold's outlook because of possible dollar strength, an equities rally and tame inflation.

Last week gold posted its biggest weekly rise in three months as the threat of escalating tensions in Iraq and the Federal Reserve's lack of commitment to raising interest rates sparked a wave of short covering

The recent crisis occurring in Iraq has boosted gold prices. Sunni tribes have joined a militant takeover of northern Iraq. Oil prices were pushed to 9-month highs last week, with a consequent knock-on effect on gold.

For a better analysis of gold prices movements over the week, I have given gold's performance on a daily basis below.

MONDAY- Following previous weeks trends, this week too, gold began on a positive note due to weak US equities and increasing violence in Iraq. Gold was hovering around $1321.90. As Iran's supreme leader accused the United States on Sunday of trying to retake control of Iraq by exploiting sectarian rivalries and as Sunni insurgents drove toward Baghdad from new strongholds along the Syrian border, we saw gold extending last week's 3 per cent gains over these issues.

TUESDAY- Following suit, Gold hit a two-month high on Tuesday since mid-March as a drop in European shares after soft German economic data and a weaker dollar helped the metal build on last week's gains. Spot gold hit a peak of $1,325.70 and was up 0.5 percent at $1,323.80 an ounce during the trading sessions.

WEDNESDAY- Gold fell on Wednesday as physical buying dried up after prices jumped to their highest level in two months in the previous session. Gold dipped $3.31 an ounce to $1,314.29 after rising to $1,325.90 on Tuesday, its strongest since April 15. It has gained 9 percent so far this year.

THURSDAY- Gold fell on Thursday as upbeat U.S. jobless claims data and weaker crude oil prices sent prices below a two-month high hit earlier this week. Another report on Thursday showed the number of Americans seeking unemployment benefits fell again last week.

Gold's appeal as a hedge has definitely declined as the market is under a strong belief of an expanding economy. Recent gains in gold were mainly motivated by short covering as speculators aggressively bought back their bearish bets. Fed President James Bullard stated that the interest rates increases could happen soon. This further got gold prices under pressure. Also negative, was a drop in crude oil prices as fears eased over export disruption from war-ravaged Iraq.

FRIDAY- Friday too, gold prices declined. Nearly flat US equities and a slightly lower dollar failed to inspire gold, when data showed US consumer sentiment rose in June as consumers remained optimistic and the sluggish first quarter was due to difficult winter conditions.


Traders warned that bullion could see some additional choppy trading amid concerns over weak imports in top consumer China. Hong Kong released import/export statistics, which showed a drop of net Chinese Gold imports to 52.3 tons, which is the lowest number since January 2013. China's total gold imports from Hong Kong dropped 17 percent to 67.233 tonnes in May from 80.817 tonnes in April, according to data emailed to Reuters by the Hong Kong Census and Statistics Department.

There are several factors that could affect this number:

• The rising gold prices have dampened the demand for gold
• The ongoing talks about trade finance, where Gold was apparently used in the past to borrow cheaper currency
• A liquidation of Gold as collateral
• Direct Gold imports into China are said to be growing, as there is no Chinese official data released such imports would be difficult to track.

Moreover, India has witnessed a weak start to the monsoon. This may curb the domestic gold demand, as 70 per cent of the gold demand in India comes from the rural areas that are dependent on agriculture as its main source of income. The majority of Indian gold purchases are made in the agricultural sector, and a good harvest typically raises income levels and translates into greater bullion demand. We still await July and August and hope for better monsoons.

Meanwhile we expect gold and silver to trade in the following prices range:

METAL	INTERNATIONAL	DOMESTIC
GOLD	$1293 - $1340 an ounce	INR 28,000 - INR 29,500 per 10 gm
SILVER	$20.40 - $22.00 an ounce	INR 44,000 - INR 49,000 per kg

- Previous blog -
"Iraq to Ukraine- Safe Haven Boost"
http://www.riddisiddhibullionsltd.blogspot.in/2014/06/iraq-to-ukraine-safe-haven-boost.html