Gold price to decline ahead of FOMC meet

Fed's decision to delay tapering of QE may bring some respite

Gold is set to decline in near term on easing tensions in Syria and a positive US economic data presented by the Federal Reserve which strongly advocate tapering of quantitative easing sooner than later.

 

After initial fall, gold recovered marginally Friday afternoon but, closed 6.09 per cent lower over two weeks at $1326.39 an oz in London. In Mumbai’s Zaveri Bazaar, the yellow metal erased a part of its two week loss on Saturday following a recovery in global sentiment. Yet, gold closed on Friday with 12.52 per cent decline since September 3.

“Correction in gold prices was inevitable ahead of the most awaited economic event of the year – the FOMC monetary policy review. When a particular asset class derives excessive support from just one major factor then the risks to sharp volatility in price movement becomes high. Gold has undergone its ups and downs on the basis of one price driver in this case being the quantitative easing program by the Federal Reserve. While actually dwelling into the picture will also show a host of other factors that did provide direction to upside in prices, the Fed factor in particular was looked upon by the world markets as a major determinant of prices,” said Reena Rohit, Chief Manager (non-agri commodities and currencies), Angel Commodities Broking.

Month-to-date, gold and silver prices have slumped sharply in both dollar and rupee terms. While losses in gold and silver in the international markets are seen around 5 per cent, in the Indian markets the correction has been sharper to the tune of more than 10 per cent in case of gold and around 8.5 per cent in silver prices on the MCX. The yellow metal slipped below Rs 30,000 per 10gm on the MCX and the downside below this crucial mark suggests two things – firstly, Rupee appreciation has added its negative effect on Indian prices and secondly, investors have become cautious ahead of the Fed’s decision towards QE taper.

 “But now the scenario has changed. Fear over geopolitical tension has eased. Also, there is a clear consensus among leaders that developing countries will hold the key for determining a direction in global economies. All these factors are currently supporting precious metals’ fall,” said Gnanasekar Thiagarajan, Director, Commtrendz Research.

Gold may test $1300 an oz once and will bounce back. Sustained fall below $1300 an oz will create a lot of problems for miners as this level being the cost of production. Miners will start cost reduction through lots of measures which may include production cut which will ultimately result into genuine demand-supply problem going forward.

Being cost of production higher due to elevated level of labour, electricity and other costs, selling gold below $1.300 an oz will be a loss proposition for miners. Hence, gold price may bounce back towards $1500 an oz towards early next year as forecast by Thomson Reuters GFMS, a global precious metals consultancy.

“All eyes are on FOMC meeting scheduled on September 17-18 due to the Fed’s crucial decision on initiating tapering of stimulus, especially at a time when markets are finding it difficult to absorb the impact of the expected QE taper,” said Reena.

Additionally, latest economic data released last week has shown a mixed economic picture and may contribute in delaying the Fed’s call for an immediate taper. In case the central banker does go ahead with it, we expect it to be in smaller tranches in order to avoid panic in the markets. 

If the Fed plans to delay its decision of QE taper then gold and silver prices will receive some respite but this would likely last only until the central bank begins its pullback, which if not now, will surely be on the cards in the near future as overall US economic recovery is clearly seen.