Gold closes in on $1,400, but could slump

Gold prices have had a good few weeks, shooting up from $1,278 per troy ounce on August 6, 2013, to $1,398/oz on August 23, 2013, a surge of more than 9 per cent in a little over two weeks.

This marks an 11-week high to levels seen in early June, when gold slumped below the $1,400-mark on June 7, 2013, and hasn’t breached that psychological level since.

In fact, spot gold price slumped to a 3-year low of $1,181/oz in early morning trade on June 28, 2013, and it is now up more than 18 per cent from that level in less than two months.

Summer has, traditionally, been a slow period for gold sales and a recovery of this sort looks good on the charts, especially during summer. But if you thought this was enough to signal a turnaround in the bullion’s fortunes for the rest of the year, well, hold your horses.

“Precious metals are by no means out of the woods yet, with gold being still the one with the most uncertainty hanging over its head,” Gerhard Schubert, Head of Commodities, Emirates NBD bank, wrote in his latest weekly report on precious metals.

The catalyst for the most recent bounce-back in gold prices (it shot up $30/oz, from $1,368 to $1,398, on Friday itself) was the “disappointing new home sales numbers out of the US,” wrote Schubert.

“The disappointing numbers from Friday, plus the worse-than-expected weekly jobless claims, foster the belief in some quarters that the end to QE3 as we know it, might not be set in stone yet,” he said.

“Analysts are now debating that the Fed might taper only $10 billion from the monthly $85 billion purchases, which leaves the balance sheet of the Fed still well above $4 trillion at the end of the year,” he added.

A tapering of just $10 billion a month will, for all practical purposes, be only notional and will not have much real impact on gold prices. However, the beginning of the end of the QE program, however small it might be, will still have a significant psychological impact on asset prices across the world, and gold price might again come under pressure especially if it continues to gain between now and then.

A recent note by Barclays bank corroborates that fear. “Our model projects that the price will post a small uptick by the end of Q3 2013 but face downward pressure in Q4, reaching an average of $1,294/oz for Q4 13 ($31/oz below our forecast),” the bank said in a note issued this weekend.

“Our model stresses three alternative scenarios, and in line with our expectations finds that should the likelihood of a federal funds rate hike increase, further downside risk for prices is likely, declining to $1,229/oz in December 2013,” it noted.

However, if the US Federal Reserve doers a rethink and does not announce its widely expected tapering off during its next meeting in mid-September, and decides to push the rollback to December, gold prices will receive an immediate shot-in-the-arm, Barclays said.

“But if Fed tapering is delayed into say December, the model sees prices rising to $1,482/oz as soon as October,” it said.

That price-point takes into consideration global investment demand, as well as real physical demand emanating from India due to the October festive season, including Diwali. Nevertheless, with India trying all it can to dampen gold demand by raising import duty to 10 per cent on precious metals, it is likely that Indian demand will remain muted this Diwali, says Barclays.

“We expect physical demand support to be limited in light of the recent import duty and regulatory changes,” it said.

The bank in fact maintains that it views the risks for the gold market as being skewed to the downside under its base-case scenario.

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