Gold Price Round-Up: Fatigue Setting in

on Oct 26, 2012

On October 26, Reuters reported that gold dropped by more than half a percent in volatile trade, heading for its third week of decline. Among the factors contributing to gold’s decline and market volatility were a stronger dollar and uncertainty related to the looming US fiscal cliff.

**Gold Drops below $1,700**
With the effect of quantitative easing announcements in September wearing off, gold bullion has declined around five percent after hitting an 11-month high above $1,795 an ounce in early October. On October 24, gold dropped to a seven-week low of $1,698, dragged down by a stronger dollar. “People are still looking a bit at the downside rather than the upside for the time being, waiting for it to break $1,700,” said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong, as quoted by Reuters.

Bloomberg quotes Edel Tully, a London-based UBS AG (NYSE:UBS) analyst as saying that fatigue had set in among fund managers after they boosted bets and prices failed to reach $1,800.
Reuters reports that the physical market was also subdued because of a public holiday in Indonesia, Malaysia and Singapore. Dealers noted an increase in purchases from Thailand, with one dealer from Singapore saying that it was “a mixture of buying and selling”. Dealers, however, were surprised by weak demand from India, given that the festival season which is known as a time to buy gold, is already underway. “In fact, Indian consumers started to sell again when the market was a bit higher. Maybe they will leave it to the last minute before coming back to buy again,” noted the Singapore dealer, as quoted by Reuters. The festival season in India started on October 24 and will end in November.

**Central Banks Demand**
!m[The Precious Metals Headed For A Third Straight Week Of Decline ](/uploads/story/651/thumbs/pic1_inline.png)Bloomberg, however, reported on October 25 that there was a rising demand from central banks which were increasing holdings of the precious metal. Data on the website of the International Monetary Fund (IMF) indicated that both Brazil and Turkey added to their respective gold reserves. “More and more central banks are getting involved in the gold market,” pointed out David Meger, the director of metal trading at Vision Financial Markets, as quoted by Bloomberg. “We are seeing some value buying after prices slumped.”

In August, the World Gold Council reported that nations purchased 254.2 tonnes in the first half of the year and were likely to add close to 500 tonnes for 2012 as a whole.
**US Fiscal Cliff**
As noted in the Reuters article, gold’s recent decline was also related to the US fiscal cliff uncertainty, or the upcoming expiry of the tax cuts introduced during the Bush era, which threatens to send the economy back into recession unless the Congress intervenes. Bloomberg, however, quotes Deutsche Bank’s Michael Lewis as saying that gold is less vulnerable to the risks associated with the fiscal cliff than oil and industrial metals. Mr Lewis also noted that gold would not become a bubble, unless prices rose to a record high above $2,200 an ounce.

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“At least we have confirmed the bottom at $1,700. We traded once below that, just briefly, but it looks like after that, there’s more buying than selling,” points out Yuichi Ikemizu, Standard Bank brand manager, as quoted by Reuters. “I don’t think we are going to see more panic selling,” commented Mr Ikemizu, adding that next week gold was likely to trade in a range of $1,700 to $1,740.

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