Gold sinks to 2-month low of $1,622: Should I buy now?

Don’t try to catch a falling knife, even if it’s a golden one

Spot gold prices made a new 60-day-low as they fell more than 2.80 per cent to around $1,622 per ounce at 3.30pm UAE time (11.30am GMT) today, continuing their journey south from yesterday’s after-hours battering that the yellow metal received.

In Dubai, 24 carat gold is once again trading at below Dh200 per gram for the first time in more than two months. According to Dubai Gold and Jewellery Group’s morning prices, 24K gold is retailing at Dh196.75 per gram, 22K at Dh185 per gram, 21K at Dh176 per gram and 18K at Dh150 per gram.

The international price closed at $1,670 per ounce yesterday, down $7.50 per ounce on Monday’s close, but the precious metal lost its lustre and plunged to $1,645/oz in after-hours trade when minutes of the US Federal Reserve’s March 13 meeting were made public.

According to the minutes, the Fed doesn’t seem to be concerned about short or medium-term inflation and that economic growth was on track. “The information reviewed at the March 13 meeting suggested that economic activity was expanding moderately,” according to the minutes made public by the US Federal Reserve.

“Overall consumer price inflation was relatively subdued in recent months. More recently, prices of crude oil and gasoline increased substantially. Measures of long-run inflation expectations remained stable,” the minutes said. “Higher prices for energy and food put upward pressure on headline inflation in foreign economies, but measures of core inflation remained subdued.”

Traders were seen dumping gold yesterday and this morning as demand for the metal, which is also seen as an inflation hedge, will go down if economic activity picks up and promises a better return on investment for punters.

The Fed observed that although the recent higher oil prices have had limited impact on headline inflation, energy prices are expected to “level out” in the second half of 2012, and maintained that inflation is expected to remain subdued until the end of 2013.

“[W]ith energy prices expected to level out in the second half of this year, substantial resource slack persisting over the forecast period, and stable long-run inflation expectations, the staff continued to project that inflation would be subdued in 2012 and 2013,” the minutes said.

With gold price down to mid-January levels, retail interest, especially from the traditionally strong consumer markets of India and China, could see prices stabilise at these levels.

Although most analysts still believe that gold will, in the next 12 months or so, close in on $2,000 per ounce, there remain a number of factors that, together, could further pull down gold prices in the short term.

India, the world’s largest consumer of gold, recently doubled the import duty on gold, and this will keep at least a part of consumers in the bullion-hungry country on the sidelines.

Moreover, the Chinese appetite for gold has been restrained so far this year although the World Gold Council believes that China could overtake India as the world’s largest gold consumer by the end of this year.

More importantly, with the global financial markets showing renewed signs of life recently, reflected in a buoyant equity market, a number of traders may liquidate their gold holdings and jump on the equities bandwagon with a bolstered risk appetite.

In effect, gold price may fall further, and the one piece of advice that you might want to take is: don’t try to catch a falling knife, even if it’s a golden one.

[Image by Shutterstock]

 

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