Monday 19 March 2012, [09:30] EDT
Gold “Could Correct to $1600” with “Buyers Reluctant”, India Strike Sees Physical Activity “Slump”, 2013 Fed Rate Hike “Now Priced In”
THE SPOT gold price held above $1650 per ounce Monday morning in London – staying within $10 of where it closed last week, but over 4% down on the month so far.
“The market feels a bit top-heavy, which may imply a further correction on the downside to $1600,” warns the latest note from Swiss precious metals refiner MKS.
The silver price fell as low as $32.34 per ounce during Monday morning’s London trade, but rallied back above $32.50 by lunchtime, while commodities were broadly flat on the day.
“Physical [bullion] market activity…has slumped,” says Standard Bank commodity strategist Marc Ground, citing the closure of Indian bullion markets as gold dealers held a three-day strike following the government’s announcement last Friday that it is doubling import duties on gold, as a percentage of the gold price, for the second time this year.
Over in China, the world’s second largest gold consumer after India, average property prices fell last month in 45 of 70 cities surveyed an official report published by the National Bureau of Statistics on Sunday finds.
European stock markets were broadly flat this morning ahead of news that Apple plans to pay a dividend of $2.65 a share and launch a stock buyback program, while US Treasury bonds gave up early gains.
Investment bank UBS cut its gold price forecasts on Monday. UBS’s one-month forecast was cut from $1775 per ounce to $1550, while the three-month forecast fell from $1950 to $1600.
“We see gold now in a challenging environment,” says UBS precious metals strategist Edel Tully, who won last year’s London Bullion Market Association gold forecast competition.
“In as much as higher US [Treasury bond] yields reflect an improvement in sentiment towards growth, rather than nervousness about sovereign credit or inflation, we think gold buyers will be reluctant.”
Economists at Barclays Capital meantime argue that recent falls in the US unemployment rate are in part down to people dropping out of the labor force, and that this could force the Federal Reserve to tighten monetary policy sooner than previously expected in order to combat inflation risks.
“If the goal became to restore the employment-to-population ratio to where it was prior to the recession, we’d need an unemployment rate of about 3%, and that would clearly lead to monetary policy being too easy for too long,” Dean Maki, Barclays chief US economist, tells newswire Bloomberg.
“We think this is a factor contributing to medium-term inflation risks.”
The Fed revealed back in January that most of its policymakers expect interest rates to remain near zero until at least late 2014.
Monthly US consumer price inflation meantime rose to its highest level in nearly a year last month, data published on Friday show.
“The market no longer believes that ‘late 2014′ is when rates will rise,” said M&G Investments’ Bond Vigilantes blog on Friday.
“The market is now pricing in a Fed rate hike in 2013.”
Here in the UK, the British government plans to take on the pension fund of the Royal Mail, subject to European Commission approval, in preparation for privatizing the state-owned postal service.
The move would guarantee postal workers’ retirement benefits, writing off around £1 billion of the Royal Mail’s debt and taking over an estimated £4.6 billion pension deficit, the Financial Times reports.
“The liabilities,” writes the FT’s Tony Jackson, “will vanish off the government’s balance sheet…that is, no doubt, fiscally imprudent.”
Jackson argues that the move is another example of financial repression by the British government.
“The government,” adds Philip Booth of think tank the Institute of Economic Affairs, “would not allow a private sector company to get away with such shoddy – indeed, underhand – accounting practices.”
On the gold futures and options markets, the difference between bullish and bearish contracts held by traders on the New York Comex – the so-called speculative net long – fell for the second week running in the week ended last Tuesday, dropping 5%, figures published by the Commodity Futures Trading Commission show.
“We expect that [even] more speculative length has been removed after last week’s sell-off,” says Standard Bank’s Ground.
The volume of gold bullion held to back shares in the SPDR Gold Trust (GLD ) – the world’s biggest gold ETF – dipped slightly last week to 1293.2 tonnes. Silver bullion holdings in the world’s largest silver ETF, the iShares Silver Trust (SLV), remained static at 9752.7 tonnes.
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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