By Rutam Vora
As the much-awaited US Federal Reserve (Fed)'s Federal Open Market Committee (FOMC) meet gets closer, gold prices are seeking direction amid mix sentiment of nervousness and bullishness. Gold prices moved upwards on Tuesday, paring losses from the previous session, with investors looking up to Fed's decision on possible third round of quantitative easing (QE 3) to stimulate the US economy.
Gold quoted at $ 1,730.90 an ounce in early trades on Tuesday. On futures, gold for December delivery traded up by $ 2 at $ 1731.2 per ounce on the Comex division of the New York Mercantile Exchange. Gold futures increased in Asian markets too.
Investors and analysts see gold prices firming up if Fed comes out with QE3.
"There is less possibility of QE 3 this time though, but if it happens, dollar will weaken and gold prices on COMEX may touch $ 2000 an ounce. Inflation worry will push up demand for gold as safe heaven instrument," said Ravindra Rao AVP -Commodity Research Motilal Oswal Commodities Broker Pvt Ltd.
This is not a new phenomenon for gold price movement in times of Fed's quantitative easing measures. Soon after the global economic crisis surfaced in 2007-2008, Fed announced the first round of QE in November 2008 with purchase of up to $600 billion in assets, which was later expanded in March 2009 to $1.7 trillion of Treasury debt, mortgage-backed securities and debt instruments.
In March 1, 2009, gold prices quoted in the range of $ 920 to $ 950 an ounce, which jumped sharply in November 2009 to touch $ 1180 an ounce, making it a record high for the yellow metal. Rupee quoted in the range of Rs 50.30 to Rs 51.70 during March 2009, which fell to about 46.32 levels during November 2009 as an effect of weakening of dollar due to QE measures.z
"These (stimulus measures) are temporary measures taken by the central banks. Every time, when there is a stimulus in the US or in Europe, there is sharp increase in the gold prices. But such measures do not help economies in the long run," said Rao.
QE 2 was announced in the later part of 2010. Fed announced to buy $600 billion in long-term Treasuries, in addition to the reinvestment of an additional $250 billion to $300 billion in Treasuries from earlier proceeds from mortgage-backed securities. Gold continued to soar with constant monetary push from US central bank.
Rupee, which quoted around Rs 45.60 during January 2010, further fell to Rs 44.50 during the fourth quarter of 2010. Comex gold hovered in the range of $ 1080 an ounce to $ 1160 an ounce in January 2010. After the announcement of QE 2 in the fourth quarter, gold prices jumped to $ 1310 an ounce in September 2010 and scaled further heights to touch US $ 1420 an ounce by the end of December 2010.
"There is less likelihood of third round of QE3 as US economy has not shown signs of serious deterioration. Also, there seem to be objections coming in from within the FOMC members. Also, stock markets are hovering at the elevated levels," said Chirag Mehta, fund manager - Quantum GOLD ETF, Quantum Asset Management Company Private Limited. According to experts, rupee, which is hovering at around Rs 55-56 against a dollar, may not depreciate further. "There could be appreciation in Rupee post announcement of QE3. This may limit increase of gold prices in India," said Mehta.