- Gold fails to rally on dovish Fed comments
- Investor selling continues to weigh, but other drivers are also negative
- Support at USD 1,180 per ounce is in focus
New gold measures in India?
On 11 November the Reserve Bank of India released circular No 73 concerning import of gold by nominated banks/agencies/entities. These agencies are permitted to import gold exclusively for the purpose of exports only. This circular also highlighted that no diversion for domestic use shall be permitted. On 15 November, the government slashed the import tariff value on gold in line with weak global gold prices. These measures have been implemented to avoid ways to circumvent the existing rules. Moreover, they also take into account the recent price developments. The measures taken this year to curb gold imports to improve current account balance have had a dramatic impact on the gold imports (see graph below). We expect these measures to remain in place for at least 2014, so that gold demand from India will remain depressed.
Why do dovish Fed comments not support gold?
Since our previous precious metals weekly, Fed officials have reiterated the central bank’s mantra of low interest rates for longer, especially Janet Yellen last week in her testimony to the Senate banking committee and Ben Bernanke on Wednesday morning. But gold prices did not move higher. In contrast, Fed’s Bullard comments that a tapering of the bond buying program is on the table for next month pushed gold prices lower, below the USD1,252 per ounce support. This behaviour highlights that the market is biased towards negative gold news to push gold prices lower. In addition, inflation expectations have eased and this has also taken the wind out of gold prices. Moreover, the rally in equity markets has highlighted the relative unattractiveness of gold versus other investments in an environment of higher growth. Furthermore, depressed demand from India and lower investment demand have made the negative picture complete. Better-than-expected US economic data in the coming weeks will most likely push prices towards the previous low of USD 1,180 per ounce. Therefore, our new end of the year forecast for gold is USD 1,200 per ounce and silver USD 19 per ounce.
Are investors still selling gold?
The recent data from the futures market show that investors have stepped up selling gold positions. Not only have they continued to liquidate long positions, they have increased short positions after months of short position liquidation. In addition, investors have continued to reduce total gold ETF positions as well. This signals that the sentiment has deteriorated among investors, which is clearly visible in the behaviour of gold prices.