Dollar moderation to keep gold firm

Last Updated: Wed, Oct 17, 2012 19:24 hrs

Gold prices have stabilised after the initial jump following the US Federal Reserve’s announcement of quantitative easing measures (QE3) a month before. Yet, most analysts are bullish on gold prices.

They say the US currency is expected to gradually depreciate and gold to remain the safest haven. Gold prices internationally are around $1,750 an ounce and these are likely to cross $1,800 in the December quarter. In the Mumbai market, gold had crossed Rs 32,200 per 10g after the QE3 announcement on September 13, but it has given up that level and was trading at Rs 30,950 on Wednesday.

During the first half of the year, gold prices were falling. The dollar was rising, as investors across the globe were booking profits in gold and selling other assets, parking money in the dollar, a safe haven when the Euro zone was passing through its worst period. With QE3 and a moderating European crisis, they see this reversing.

  • Gold moves inversely to dollar
  • With pressure on US currency, gold expected to rise in Dec quarter
  • Global gold ETP holdings show steady rise, indicating bulls in control

Priti Gupta, executive director, commodities & currencies, Anand Rathi Financial Services, said, “Traditionally, gold tracks currencies, especially the dollar index, and has established an inverse relationship with it. In the four years post the 2008 crisis, the relationship has not worked smoothly; on some occasions, there was a flight to safety towards both gold and the dollar, resulting in both asset classes rising. However, in the last one year, both have again moved inversely. This means except the high volatility period, gold moves inversely with the dollar.”

After QE3, prices went up initially but like most other commodities, gold also moderated a couple of percentage points. This is because the US Fed decided to buy bonds (releasing liquidity) by $40 billion a month. This is not a big sum and, hence, the gold rally will be at a measured speed.

Suki Cooper, bullion analyst with Barclays’ commodity research, said, “Gold prices have retreated in the past few days from the $1,800/oz mark but gold ETP (exchange traded products) holdings are still at record highs and speculative positions at their highest since August 2011. Gold has found some support from a pick-up in buying in India in the weeks preceding the key festival of Diwali; however, demand remains sensitive to local prices. We remain positive on gold’s outlook and expect prices to remain above $1,810.”

Globally, ETP investors have not yet started booking profit and positions are only rising. Gold ETP holdings continue to flourish, with inflows of 10.1 tonnes over the past week, taking flows for the month till date to a little over 30 tonnes. In September, there was an increase of 76 tonnes, making it the strongest month since November last year. Inflows for the year till date have reached 224 tonnes, surpassing all of last year (175 tonnes) but still below year-on-year flows for 2010 (361 tonnes). The total metal held in trust remains at record highs, with 2,599 tonnes.

Similarly, the latest CFTC (US commodity derivatives market regulator) data for the week ended October 9 revealed that speculative positioning continued to grow and remains at its highest level since August 2011. Gross long non-commercial positions are at their highest since September last year, while gross short positions have risen for two straight weeks, as gold has struggled to conquer the $1,800/oz mark and are now at a six-week high.

The global market is also tracking Indian demand. Some buying has already started. The rupee exchange rate will be the determining factor; if the rupee falls further, prices in the domestic market will be seen higher, which could be a demand dampener.

Priti Gupta said, “Prices in India will dance to the tunes of the rupee, which may not allow real gain coming to Indian investors. However, broadly, we are bullish on gold because global growth is not expected to be better and due to extra liquidity being pumped by the central banks globally, inflation is expected to remain higher. Both these will result in gold prices remaining strong.”

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