FOMC meet to determine bullion price movement

Bullion dealers are eagerly awaiting the outcome of the US Federal Open Market Committee (FOMC) meeting scheduled for December 18. At the meeting, a decision will be taken on the US government’s decision on tapering its $85-billion monthly bond-buying programme.

Bullion dealers feel a decision on the partial withdrawal of capital infusion will lead to a fall in bullion, as that will indicate a recovery in the US. On the other hand, further deferment in tapering the programme will hint at an uncertain economic environment, resulting in bullion to be treated as a safe haven investment, pushing prices up.

“Economies from China to the US have given a positive signal, with factory outputs showing a rise in the world’s two largest economies. Also, US non-farm payroll data saw an improvement, which showed the US Federal Reserves would announce tapering in its December meeting, against earlier expectations of next year,” said Sugandha Sachdeva, in-charge (metals, energy & currency research), Religare Securities Ltd.

Meanwhile, spot premium on gold declined 13 per cent on Monday at Zaveri Bazaar here, amid expectations of a cut in import duty. The government's current account deficit, the primary reason for raising gold import duty to 10 per cent early this year, fell to 3.1 per cent of gross domestic products for the six months ended September. With measures to curb gold import, availability declined in the domestic market, resulting in spot premia as high as $150/oz last week.

Gold rebounded, after nearing production costs last week, amid fears of supply constraints. His resulted from anticipation major global producers would ct production. After hitting $1,211 an oz (production cost stand at $1,200 an oz), gold closed at $1,238.8 an oz in London on Friday, a weekly rise of 0.79 per cent, or $9.75.

In India, a marginal depreciation in the rupee helped gold prices appreciate. With the spot price quoted with a premium of $100, owing to a supply shortage, standard gold closed with a weekly gain of 1.42 per cent, or Rs 430, at Rs 30,620/g in India. The rupee depreciated 1.16 per cent to close at 62.13/ dollar on Friday.

Silver prices rose 2.49 per cent to close at Rs 45,200 a kg in the spot market here on Friday.

Reena Rohit, chief manager, non-agri commodities and currencies, Angel Broking, said a sense of caution was likely in world markets, as positive economic developments in the US pointed to tapering of the quantitative easing (QE) programme. "The likelihood of QE taper is lower in the meeting scheduled on Wednesday, as the unemployment rate is still above the Fed's target of 6.5 per cent and inflation continues to remain low. Also, the new Federal Reserve chairperson is expected to begin her term in January 2014 and until then, the central bank may avoid making the pullback," she said.

The second half of this month is expected to be volatile. Unlike the usual lull seen on account of Christmas and New Year celebrations, remarks and indications by the Fed will drive sentiments.

For the next fortnight, the gold and silver price trend would be tied to a decision by the Fed. Since it was expected the stimulus spending would continue for now, gold prices were likely to find some relief after the FOMC meet, Rohit said, adding depending on the cues provided by the Fed, gold and silver would set the course for next year.

While investors may cautiously move towards gold, silver may be a safe bet for medium- to long-term investment, as demand for the precious metal is set to rise due to a rebound in industrial production.