Gold price fails to hold $1,400 – it isn’t looking good for the bulls

Familiar falter-at-the-alter saw gold prices once again give away

A now-familiar falter-at-the-alter saw gold prices once again give away their mid-week gains before the markets closed for the week last Friday, with spot gold price retreating to below $1,400 per troy ounce again.

That marked the fourth time in as many sessions that gold assiduously clawed its way up the elusive Mt $1,400 peak, only to slide back under profit-pressures.

It’s been really disappointing for the avid gold bull to see the once-mighty precious metal fail miserably to climb above a level that’s more than a quarter less than its highest ever level, of $1,923/oz that it cracked in September 2011.

“It has been disappointing to see that gold, again and again, could not hold to gains and prices above $1,400. The physical markets have slowed down visibly, and the premiums reported are all starting to ‘normalize’,” said Gerhard Schubert, Head of Commodities, Emirates NBD (Private Banking), in his latest weekly precious metals report published yesterday.

Spot gold price has indeed been yo-yoing between $1,350 and $1,420 over the past few weeks, without managing to hold on above $1,400 for any considerable amount of time, but not falling below $1,380 for about a week now.

Is this, then, the range that gold prices will be bound to this summer?

The most recent declines came after the US announced better-than-expected employment numbers for the month of April. If one looks at it naïvely, better employment would mean that more people would earn more, and therefore have better spending power to buy more gold – so prices should go up.

But that isn’t how gold investors saw it last week. Better employment numbers suggest a stabilizing economy, which will mean that, going forward, the US Federal Reserve will have less of an incentive to continue with its bond-purchase programme (quantitative easing) or at least consider scaling it down from the current $80 billion per month levels.

A good proportion of that money goes into gold investments, and that is something that has been propelling the gold price boat ever since the programme was first announced in November 2008. The price of gold back then was around $725 per troy ounce, and was at one time up by more than two-and-a-half times that level.

“The NFP [non-farm payroll] number appeared to be a little bit better than expected based on the weekly numbers seen during the month. The downward revision for April was the counterbalance to the new figures, while the overall headline unemployment number grew to 7.6 per cent. All of this is part of the growing believe that the Federal Reserve Bank will start tapering the Quantitative Easing program sooner rather than later,” said Emirates NBD’s Schubert.

“I, in my personal opinion, disagree with that view, as the Fed was looking for an unemployment rate of 6.5 per cent and an inflation target of 2.5 per cent. It seems to me that we are far away on both accounts and that nothing is going to happen until potentially, if at all in 2013, the last quarter of this year,” he opined.

The markets, however, remained jittery and investors decided to take whatever little profit they could on the bullion (the metal had reached a brief high on Thursday of $1,423), and dumped gold before the market closed for the week on Friday, pushing it below $1,385 a troy ounce.

Another immediate reason for the recent retreat in gold prices is the fact that India, the world’s largest consumer of gold, has been trying very hard to wean its citizens off the gold-buying frenzy which it partly blames for its ballooning current account deficit. In that light, India last week raised the gold import duty for a second time this year to 8 per cent, from the earlier 6 per cent.

This will make it more expensive for customers in India to purchase gold as compared with those in other markets across the world, and might just curb Indians’ instinct, a little, to buy the precious metal at every auspicious occasion and during the wedding season.

But whether or not such restrictions will continue to dampen Indians’ seemingly non-satiable appetite for gold in the long term is a matter of debate. “The very strong attempts of the Indian government to curb the gold imports are having an impact, but a slowdown in imports was expected anyhow, after the Akshaya Tritiya festival. It is much too early to see how successful the actions of the Indian government are going to be, but I would like to borrow a sentence published earlier this week by David Govett (Marex London), in which he said: ‘If India wants to buy gold, India will buy gold’. I wholeheartedly agree with that statement and it is difficult to see how to legislate against auspicious gold buying,” Schubert noted in his weekly report.

In addition to that, with the recent rumours about a scale-back of the US QE3 programme, analysts fear that gold could, in theory, retreat to closer to levels before the QE1 programme was unveiled.

That would mean an approximately 50 per cent retreat from the current levels, which seems a little nerve-wracking, considering the amount of physical buying going on at these levels.

However, analysts agree that, in the absence of an immediate trigger – bad news – gold prices will remain depressed. “Overall, it is difficult to see where the next spark should come from, which would make gold rally above and sustain the $1,400 level,”  said Schubert.

“Only then might we even consider moving towards the big resistance levels at $1,485 and $1,525. It might after all, be down to strong upward pressure from platinum to produce the pricing support for ‘all’ precious metals. This could be the missing link, which would force more short positions to be covered,” he speculated.

Nevertheless, gold price is more likely to head downward, to Emirates NBD’s suggested support levels of $1,355 and then $1,322, than the suggested resistance levels of $1,420 and $1,485 this week.

[Image via Shutterstock]

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