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China “Offers Sturdy Floor” in Gold, But US Fed Meeting “Risks Downside”

PRECIOUS METALS held in a tight range in London on Tuesday morning, moving sideways as world stock markets rose and commodities slipped ahead of the US Federal Reserve meeting, which begins today.

“No outstanding features, volumes fairly light and very little to report,” says broker Marex Spectron.

After telegraphing its intention to start reducing the $85 billion in monthly quantitative easing as soon as September, the Fed will announce its latest policy on Wednesday, soon after the release of official US data for second-quarter GDP.

Gold moved on Tuesday morning barely $4 per ounce above $1322 – the “crash” low of mid-April.

Silver moved just 0.7% around $19.70 per ounce.

“We could see some downside open up,” says Standard Bank’s commodities team, “if the Fed announces tomorrow that it will stay the tapering course.”

Looking at recent bullion price action, “Gold is pushing hard” says technical analysis from Commerzbank “into the 2-month downtrend and the 55-day moving average at $1333/40.”

Gold bullion and futures prices “reacted violently in June” Federal Reserve comments on policy, says a note from Bank of America-Merrill Lynch. But now “near-dated gold volatility has been falling in recent weeks.

“After the initial Fed fears lifted 10-year US Treasury rates from 1.6% to 2.7% in just a few weeks, rates seem to have stabilized in a 2.5% to 2.6% range, contributing to a drop in gold vols.

This “normalization” says BAML is now being reflected in gold futures prices. August futures settled Monday below further-dated contracts, confirming what the bank calls gold’s “typically contango structure” – whereby prices are higher for delivery further into the future.

But “we are moving closer and closer to tapering,” reckons Tom Tucci, head of Treasury trading at CIBC World Markets, currently with $12bn in assets under management, speaking to Bloomberg.

“With no new news, the risk right now is for higher rates, not lower,” says Tucci, saying 10-year Treasuries should yield around 2.75% “given the state of the economy and the Fed’s stance.”

The quantity of gold bullion held to back investors’ shares in exchange-traded trusts funds was unchanged Monday, remaining 25% lower from the start of 2013 at four-year lows.

Emerging-market central banks “disappointed gold bulls” with their bullion purchases in June, says a note from Swiss investment bank and London market-maker Credit Suisse.

“Reserve asset managers are as unwilling to ‘catch a falling knife’ as any other fund manager we think,” says the note, “and in general are wary of spikes in volatility.”

But in China – now the world’s second-largest economy, and likely to overtake India as world No.1 gold consumer in 2013 – private household demand for gold bullion “does hold the promise of a sturdy price floor” says a note from fellow Swiss investment bank and London market-maker UBS.

Moreover, “In China banks are setting up and/or growing gold accumulation plans offered to the public. Better and easier access to gold via banks’ growing networks combined with strong appetite from retail customers have driven the tremendous appetite from China this year.”

 

Adrian Ash

BullionVault

 

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Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold and silver in Zurich, Switzerland for just 0.5% commission.

 

(c) BullionVault 2013

 

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