Gold Falls after Reaching Four-Month High

on Aug 29, 2012
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On Monday the price of gold reached $1,676.45/oz, its highest level in four and a half months. The considerable upward push followed a report showing US consumer confidence dropped in August to the lowest in nine months. On Wednesday the streak of seven consecutive days of rising prices ended as the precious metal’s price eased by 0.4 percent to $1,657.50/oz.

Analysts claim investors are starting slowly to get back into the market amid expectations of a third round of quantitative easing – dubbed QE3 – by the Federal Reserve.
“There are increasing signs that the US will have to do more monetary policy easing such as QE3 and that change in perception has given a little boost to gold prices. It seems investors are starting to think there is some potential in gold,” said Matthew Turner, precious metals strategist at Mitsubishi Corporation

Fed Chairman Ben Bernanke is expected to deliver a speech on Friday in Jackson Hole, Wyoming on whether there will be a QE3. Most observers expect another round of government bond purchases to inject funds in the economy.
“We see near-term risks of a reversal if Jackson Hole does not deliver what the market is hoping for and gold could challenge $1,650 support and possibly $1,630,” said Nick Trevethan, senior metals strategist at ANZ in Singapore.

!m[](/uploads/story/310/thumbs/pic1_inline.png)James Steel from HSBC also said gold prices will abruptly correct if Bernanke’s speech hints at a distancing of the Fed from further monetary policy easing. Europe’s situation plays another major role in the price of the precious metal. Ongoing weakness in the Eurozone will likely see a further decline in the euro, which would mean a strengthening of the dollar and downward impact on gold prices. For now the euro is firm but investors are prepared for movements in any direction depending on what goes down during the European Central Bank policy meeting next week.

It’s too early to judge whether gold will once again regain “safe haven” status as investors are yet unsure of the Fed’s plans. The only substantial peak since the 16 per cent fall from record highs of $1,920 last September was in February when the price crawled back to $1,790. That modest gain was due to the Fed announcing its intention to keep interest rates near zero until at least the end of 2014. Since then, with no announcements of further easing, prices have shed around seven percent.

Meanwhile, physical gold demand is expected to surge as India approaches its festival and wedding season, culminating with Diwali, the Hindu festival of light. “There had been some selling from Indonesia. We haven’t seen much buying from India, but they are preparing for the high season. If prices go down they will take the opportunity to buy.” said a dealer in Singapore.
Despite the uncertainty, gold ownership has increased in recent weeks, with holdings of gold in exchange-traded products hitting a record 71.53 million ounces on Friday. The bullish mood was bolstered by concerns about supply from South Africa, which is a major gold producer and has 80 per cent of the world’s platinum. Violence in Lonmin’s Marikana mine has disrupted mining operations and has driven up platinum prices.

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