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Gold prices to fall ahead of FOMC meet

Source : BUSINESS_STANDARD
Last Updated: Sat, Sep 14, 2013 19:40 hrs
A saleswoman displays a gold necklace at a jewellery showroom in Kolkata

Gold prices are set to decline in the near term on easing tensions in Syria and positive US economic data presented by the US Federal Reserve, which advocate tapering of the bond-buying programme in that country sooner rather than later.

After the initial fall, gold prices recovered marginally on Friday afternoon, before closing at $1326.39/ounce (oz) in London, 6.09 per cent lower compared to two weeks earlier. In Mumbai's Zaveri Bazaar, it erased a part of its two-week loss on Saturday, following a recovery in global sentiment. At close on Friday, gold prices were 12.52 per cent lower compared to September 3.



"The correction in gold prices was inevitable, ahead of the most awaited economic event of the year - the FOMC (Federal Open Market Committee)'s monetary policy review. When a particular asset class derives excessive support from just one major factor, the risks to sharp volatility in price movement are high. Gold has undergone ups and downs on the basis of a single price driver - the US Federal Reserve's quantitative easing programme. While actually dwelling into the picture shows a host of other factors that provides direction to an upside in prices, the Fed factor was particularly looked upon by world markets as a major determinant of prices," said Reena Rohit, chief manager (non-agri commodities and currencies), Angel Commodities Broking.

So far this month, gold and silver prices have fallen sharply, in both dollar and rupee terms. While losses in gold and silver in the international markets stood at about five per cent, the correction in the Indian markets was sharper - about 10 per cent in the case of gold and 8.5 per cent for silver on MCX. Gold slipped below Rs 30,000/10g on MCX. The downside below this crucial mark suggests two things: First, rupee appreciation has added a negative effect to Indian prices and second, investors have turned cautious ahead of the Fed's decision on tapering its bond-buying programme.

"But now, the situation has changed. Fears over geopolitical tensions have eased. Also, there is a clear consensus among leaders that developing countries would hold the key to determining a direction for the global economy. Currently, all these factors are supporting the fall in precious metals," said Gnanasekar Thiagarajan, director, Commtrendz Research.

Gold may test $1,300/oz, before bouncing back. Sustained fall below $1,300/oz would lead to hurdles for miners, as this level is the cost of production. Miners would start cost reduction through various measures that may include production cuts, which would ultimately result in demand-supply woes.

As production costs are high due to high labour, electricity and other costs, selling gold below $1,300/oz would lead to losses for miners. Therefore, gold prices may bounce back towards $1,500/oz by early next year, as estimated by Thomson Reuters GFMS, a global precious metals consultancy.

"All eyes are on the FOMC meeting scheduled on September 17-18, due to the Fed's crucial decision on initiating tapering of stimulus, especially at a time when markets are finding it difficult to absorb the impact of the expected tapering," said Rohit.

In case the US Federal Reserve decides to taper the bond-buying programme, it is expected this would be in tranches, to avoid panic in markets. If the Fed plans to delay a decision on tapering the quantitative easing, gold and silver prices would get some respite. But this is likely to last only till the central bank begins a pullback, which would surely be on the cards in the near future, as an overall US economic recovery is clearly visible.

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