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Gold Cautious Ahead of Fed Interest Rate Decision

Commodities / Gold and Silver 2010 Mar 15, 2010 - 09:31 AM GMT

By: Adrian_Ash

Commodities Best Financial Markets Analysis ArticleTHE PRICE OF GOLD gave back an early 0.6% rise vs. the Dollar as New York opened for business on Monday, slipping together with world stock markets and commodity prices ahead of tomorrow's Federal Reserve interest-rate decision.

The Euro and Sterling both fell on the currency market, helping the gold price for European and UK buyers to rise.


US Treasury bonds edged lower, nudging interest rates higher. German and UK government debt went in the opposite direction.

"There is currently good buying just above $1100," reports Walter de Wet at Standard Bank, but while "We expect no rate change" in Tuesday's Fed announcement, "Initial tightening is likely in the form of liquidity withdrawal.

"Less liquidity would imply less support for gold."

Latest figures from US regulator the Commodity Futures Trading Commission show speculative players in gold futures and options growing their bullish position by 0.3% in the week-to-last Tuesday.

Reaching a 7-week high equal to 839 tonnes, the "net long" position – meaning the number of bullish minus bearish bets held by speculators – remained almost one-fifth below its all-time peak of October last year.

Amongst gold-industry players, meantime, the "bull ratio" rose for the first time in 5 weeks on the CFTC data, ticking up to 27.7% of all directional bets held by these "commercial traders".

The five-year average is 29.9%. It peaked above 42.7% in late-autumn 2008, as the gold price jumped by one-third from its post-Lehmans-collapse low.

"The net long position is still significantly lower than the total net long position in mid-January," notes the latest Precious Metals Weekly, published for Fortis Nederland bank by London's VM Group consultancy.

Gold ETF holdings, in contrast – used to back unleveraged trust-fund shares tracking the price of gold – are now back to their level of two months ago.

"This highlights the slightly more cautious market sentiment," says VM.

"If Dollar gold prices manage to hold up under the [current] circumstances, how are they going to perform when the US Dollar is back under pressure again?" said Philip Klapwijk, chairman of gold-analysis leaders GFMS, speaking at the weekend to Reuters.

"Given the concerns about sovereign debt in Europe and the spiraling debt in the US and Japan," says bullion bank Scotia Mocatta, "it is not difficult to see demand for Gold rising independently of what fiat currencies are doing.

"The biggest danger for gold prices is likely to come when sustainable economic growth looks achievable...encouraging money to shift out of ETFs and into equities.

"However, we do not see that happening anytime soon. Indeed we continue to expect gold to move up to new high ground."

A new report from Deutsche Bank shows the value of gold ETFs shrinking from 67% to 57% of all exchange-traded commodity assets since late 2008.

"Coupled with an improving economic environment this signals to a trend of non-precious metal commodities gaining ground over the coming year," says Deutsche analyst Christos Constandinides, quoted by London's Telegraph newspaper.

Within the global gold market, however, "There has been an expansion in exchange traded products," says Huw McKay of Australian financial services firm Westpac earlier today, speaking at the Paydirt Gold Conference in Perth, "up from accounting for 7% of total gold consumption in 2007 to 19% now.

"This is a dramatic trend movement move and it is here to stay," notes McKay, adding that jewelry consumption has fallen from 67% to 40% of annual demand in the last 3 years.

For gold prices, "What was once an invisible ceiling...a magical barrier at $1000 an ounce...is now more of a floor price going forward," says McKay.

"It is now being seen as the level at which any plunge in the gold price will start to pull out of a dive."

Also at the Paydirt Conference today, "The continuing decline in official sector sales are obviously going to be a positive thing for the price of gold," said Philip Stephenson, Asia-Pacific operations chief for world No.2 gold mining group Newmont.

"With Russia, China and India continuing to buy gold...we expect to see a continuing movement from sovereign bonds and into gold in 2010."

Calling China's private 2009 demand "insatiable", Stephenson told BusinessWeek "We saw a 20% increase in gold investment in China last year, and we're expecting similar demand levels in 2010."

"China is obviously key to all commodity markets," says GFMS Analytics director Rhona O'Connell in her column at South Africa's MineWeb site today. "[So] it will be interesting to see what happens next in the gold investment sector...especially as domestic Chinese bonds are now expected to return 6% this year as a result of China's tightened policy on lending.

"How Chinese bond funds compete with gold and other investment vehicles for attention from private individuals is a function not only of investment polices but of demographics. This year could be particularly instructive."

Meantime in India – "long the world's largest [private] consumers of gold" – "Indians have been astute in timing their purchases," says Bhavana Acharya of the BL Research Bureau, writing in today's Business Standard.

"Every price dip saw an increase in gold imports, while purchases were cut back when prices scaled up."

BL Research says Indian households now show a 77% gain on the gold they've bought over the last 3 years.

Indian gold prices have risen in 30 of the last 38 years.

To better match the duty charged on imports of gold to India – which has next-to-no domestic gold mining output – the government of neighboring Nepal today raised its gold-import duty almost three-fold to nearly 1%.

The "widening gap...open[ed] the floodgates" after India raised its import tariff four weeks ago says one Nepalese central bank official, sparking a flood of illegal imports from Nepal.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


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