Gold's safe haven value to stay awhile

With US uncertainty not resolved but only postponed by a few months, rally in metal's prices seems likely to go on

Gold prices were stable on Friday, after seeing a sharp recovery in recent days.

The market seems to have noted that the US debt ceiling issue has only been postponed, not resolved and so, the demand for gold is expected to  continue for the purpose of hedging of risk for at least one or two quarters.

On Friday, though, it was quoting around $1,314 an ounce in the international market, $3 lower than on Thursday.  On Saturday, in Mumbai’s Zaveri Bazar, it was sown Rs 15 to close at Rs 30,965 for 10g.

The 16-day standoff between Democrats and Republicans in America had traders on tenterhooks, with a turn to gold as a safe haven against uncertainties in the economy. Gold had earlier lost almost $500 an oz since the start of the financial year.

Technical analysts with Thomson Reuters said, “Technically, gold is not in a bullish zone yet. Major support is at the June low of $1,180/oz; on the upside, there is resistance at $1,336 (the 38.2 per cent retracement of the June-August rally) and $1,433/oz. With silver, we are looking at resistance at $22.46 and support at $19.17 or all the way to its June low of $18.23.”

The rally in gold prices is expected to continue, as noted earlier. “No real agreement has been reached. It has just been postponed to another date. As long as the stalemate continues, gold will continue to offer solace to investors,” says an Illinois-based analyst.

In addition, the political bickering in Washington has fuelled tension in the market and speculation is rife that the US Federal Reserve might delay its stimulus tapering until the crisis eases and current Fed chief Ben Bernanke steps down, in January 2014.

Credit ratings agency Fitch has warned that the Unites States’ prized AAA credit rating is under watch.

“Gold is benefiting from renewed investor interest in response to the fact that the US’ problems have yet again been deferred. If the Treasury market comes under pressure next year, as it may with yet another debt ceiling round, this will put renewed stress on banks,” says Rhona O’Connell, head of metals research & forecasts at Thomson Reuters.

With such uncertainty in place, the Fed might delay its decision to begin tapering until at least March next year, when some political agreement over the debt ceiling might be achieved. In addition, Janet Yellen, the next Fed chief, is said to be “dovish,” further delaying tapering of the expansionary bond-buying programme. The Fed is committed to purchasing $85 billion in new debt per month as part of its quantitative easing. These measures from the US central bank support gold prices, as extra liquidity tends to debase the dollar and create future inflationary risks.

Analyst Sugandha Sachdeva of Religare Securities also points to increased physical demand for gold from India ahead of Dhanteras and Diwali. Indonesian demand is also rising, with Eid purchases.

“For now, the debt ceiling has been kicked down the road to February 7, when we will once again be forced to watch the painful spectacle of US politicians deciding whether or not to default,” says London-based Abhishek Deshpande, lead oil analyst at Natixis.

“It is no surprise that the major creditor nations are upset with the US, and comments from both Chinese and Japanese spokesmen clearly demonstrate a high degree of ongoing concern.”