Spot gold tops Rs 29,000 after 20 weeks

Fed news on rates, Spanish debt downgrade & dipping rupee help its swell

Gold entered a bull run again today, after 20 weeks, on the  decision by the US Federal Reserve not to raise interest rates till 2014. Also, the downgrading of Spain’s long-term credit rating by global agency Standard & Poor’s (S&P) spurred gold’s appeal as a hedge against inflation.

In India, the depreciating rupee helped gold revisit the benchmark Rs 29,000 per 10g on the spot market, for the first time after December 8 last year. Standard gold rose Rs 135 on Friday at Zaveri Bazar here, to close at Rs 29,045 per 10g. The surge meant most bullion dealers’ shops in the spot market were deserted, as consumers abstained from fresh purchases. Even need-based buying remained absent today, amid expectation of an imminent correction.

“Globally, gold is moving in bull territory. The metal has consistently performed positive for several years and, hence, is consolidating a bit. With the flow of positive news, the metal would move yet again upwards,” said Naveen Mathur, associate director, Angel Broking.

The Indian futures market also reacted sharply to the global news. On the Multi Commodity Exchange, the metal for delivery in the near-month surpassed Rs 29,000 per 10g, to trade at Rs 29,010 per 10g. Earlier, on February 28, it had reached Rs 29,252 per 10g. Meanwhile, the rupee depreciated 1.5 per cent to close at 52.55 against the dollar, compared to 51.76 on December 8.

Equities turned negative this morning after rating agency S&P cut Spain’s long-term credit rating from A to BBB+. Stock indices had closed in an upbeat mood yesterday, with the Dow up 0.8 per cent and the S&P 500 0.6 per cent, having edged above the 1,400-point mark.

Reaction to the Spanish downgrade saw the spread on the nation’s 10-year note widen by around 20 basis points over the German bund; the yield on the Spanish 10-year remains near six per cent. The euro has also weakened, with the euro versus dollar currently down 0.1 per cent and euro vs yen 0.6 per cent. The yen was broadly bid this morning, after the Bank of Japan expanded its bond buying programme by a further ¥10 trillion and data showed improvements in the nation’s industrial production and retail sales.

Gold outlook
Gold is looking slightly healthier, having been given a lift by statistics showing strong central bank demand for it. However, the metal remains confined to a down channel, which will continue to overshadow sentiment. In addition, investors still appear reluctant to significantly increase their exposure, with net exchange traded fund holdings off around 24-tonnes from last month’s all-time peak. Until gold is able to make a convincing break above the trend-line resistance of around $1,670, the metal remains vulnerable to a deeper correction, with a failure to hold $1,625, potentially leading it back below the $1,600 an oz mark.

According to Gnanasekar Thiagarajan, director, Commtrendz Research, “Gold is currently moving in a consolidation territory. An upward move could be possible with supporting positive developments in the global markets. In India, however, the yellow metal’s move would depend largely on the movement of the rupee against the dollar.”

Meanwhile, stimulus from the Fed is seen as unequivocally bullish for gold prices because extra liquidity tends to debase the dollar and create inflationary risks. It has already pumped around $2.3 trillion into the American economy, in two phases of quantitative easing. The comment by Fed chief Ben Bernanke that US monetary policy was heading in the right direction, although the central bank would also consider more bond purchases if needed, also indicated the US economy was recovering.

Spot gold was last at $1,648.1-1,648.9 per ounce, up $4.3 on yesterday’s close of $1,643.8. The metal has traded in a range of $12 so far today, between $1,653.65 on the high and $1,641.7 on the low, continuing its recent phase of consolidation but rebounding from Wednesday’s low of $1,623.9.

Both, gold and the equity markets are moving in line. But, Spain’s downgrade indicates European countries continue to face economic uncertainty. Gold, generally, finds support in case of economic uncertainty, as witnessed in Greece’s default. Analysts believe a similar upward movement may be renewed in gold yet again in the near future.