Weak Dollar and Physical Demand Could Support Gold

The spot market gold price ticked down to below $1,600 an ounce Wednesday morning—having earlier touched its highest level since before Christmas at $1,612—while stock and commodity markets also edged lower as the U.S. dollar looked to have ended its recent spell of weakness.

The previous day saw the gold price gain over 2.5% in thin trade, with the dollar falling against other major currencies on Tuesday—before easing as Asian markets reopened.

"Gold surrendered some gains overnight as Asian participants engaged in light profit-taking," says Marc Ground, commodities strategist at Standard Bank.

"Key [gold price] resistance. . .lies at the $1,630 level which represents the 200-day moving average," says Russell Browne, a technical analyst at bullion bank Scotia Mocatta.

"We believe that while the 200-day moving average holds, the risk remains for another visit to the $1,523 area."

The silver price fell to $29.05 per ounce—a 3.8% gain for the week so far—having hit $29.78 earlier in the morning.

Record trading volumes were reported on the Shanghai Gold Exchange Wednesday—following a New Year holiday yesterday—with less than three weeks to go before Chinese Lunar New Year on Jan. 23.

"The physical demand side of things will be the big factor helping to take prices back up again, along with dollar weakness," says Daniel Smith, commodities analyst at Standard Chartered in London.

This morning however the dollar rallied against the euro, with the latter dropping back below $1.30.

The U.S. Dollar Index meantime—which measures the U.S. currency's strength against six other major currencies—crept back above 80, a level it climbed to last month, having dropped below 73 earlier in 2011.

In India meantime, the federal cabinet has approved legislation that could lead to hallmarking of gold jewelry, which is currently done on a voluntary basis, being made mandatory.

"Hallmarking can boost investment demand in jewelry form," says Prithviraj Kothari, president of the Bombay Bullion Association—which today predicted a 48% quarter-on-quarter fall in Indian gold imports in the first three months of 2012. "Currently purity concerns deter many consumers from buying jewelry."

The latest World Gold Council figures show Indian gold jewelry demand accounted for 14.6% of global demand for gold bullion in the third quarter of 2011.

"Our physical sales to India yesterday were about double average levels," says a note from UBS precious metals strategist Edel Tully.

India's gold imports fell by 56% year-on-year in the final quarter of 2011—a period in which rupee weakness contributed to record high domestic gold prices– according to BBA data published Monday.

"The key factor in this market right now is not purely the gold price, but stabilization in the rupee," adds UBS's Tully, who was today announced one of the winning analysts in the London Bullion Market Association's 2011 precious metals Forecast.

Tully was the closest of 24 precious metals analysts who 12 months ago predicted the average gold price for 2011 (she forecast an average gold price of $1550 per ounce—the actual average came in at $1572).

All of the 24 analysts polled underestimated by how much the gold price would move last year. The biggest predicted range—the gap between the high and low for the year—was $555, while the actual range came in at $581.

Over in the U.S., the Federal Open Market Committee, which decides Federal Reserve monetary policy, will start publishing members' projections for future interest rate decisions, the latest FOMC minutes show.

"This is a complete 180-degree shift from the old mysterious-institution approach," reckons Ethan Harris, New York-based co-head of global economic research at Bank of America Merrill Lynch.

"It's a bit awkward—you're going to reveal to the public how much uncertainty the Fed itself has about where it's going."

The price of WTI crude oil held above $102 a barrel Wednesday morning, as Iran threatened to close the Straits of Hormuz in response to U.S. and European sanctions.

"With 40% of the world's internationally traded oil moving through the Strait of Hormuz," says HSBC analyst James Steel, "even a low probability of the strait's closure. . .can have a material impact on oil and hence on gold prices."

"Gold may not be a safe haven in financial turmoil," adds Nick Trevethan, senior commodity strategist at ANZ Bank, "but it does seem to function as a safe haven against real-world geopolitical risks."

Ben Traynor
BullionVault

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

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