Gold Monthly Update - November 2012

We infer that gold prices will trade firm, as US dollar will remain under pressure due to persistence of Federal Reserve’s with easy monetary policy.

January 01, 1970 5:30 IST | India Infoline News Service

Gold prices commenced the month of October on an optimistic note, as Mario Draghi announced that the ECB is open to buy more sovereign bonds, provided that the member nations have to make formal request for the same. The apex body’s reiterated stance reinvigorated the euro, which also provided considerable amount of support to gold prices. However during the midst of October, Precious metals traded tentatively, as better employment numbers on US front kept a lid on the prices. September jobs report showed the U.S unemployment rate dipping to 7.8%. The decline in unemployment rate implied that Federal Reserve will likely shorten its easing window, if the labour markets show further signs of progress. Gold prices retreated from 2012 highs, as US$1,790-1,800 range has proved to be a strong resistance.

At the end of October, Gold prices moved substantially lower, as disappointing corporate results in U.S led to broad based selling in various asset classes. Gold prices breached the crucial support level of US$1,730/ounce and in the process dipped below the psychological levels of US$1,700/ounce. In addition, better October US non-farm payroll numbers boosted the dollar, with US dollar index surging to two months high of 80.75. Strengthening US dollar led to further liquidation in the precious complex, with gold prices registering a low of US$1,672/ounce.

In Europe, Greek parliament has passed a fresh round of austerity measures, including spending cuts and tax measures over the next two years. The country is asked by its institutional lenders to pass 13.5bn euros (US$17.2bn) of extra cuts before receiving 31bn euros of additional financial aid. In the meantime, European Central Bank's covered-bond buying plan has expired with under half of the allotted cash put to work. As of now, the ECB had spent just 16.38bn euros out of total 40bn euros set aside to buy covered bonds.

At this juncture, gold prices have recuperated from the recent selling rout. COMEX Gold prices have managed impressive recovery, trading well above the psychological level of US$1,700/ounce, which is an encouraging sign for the bulls. Political uncertainty has ended in US after President Barack Obama has been re-elected. However re-election of US President Barack Obama has reignited the anxiety over the fiscal cliff in the world’s largest economy. Markets seem to be pre-occupied with worries over the looming fiscal cliff, wherein US$600bn package of tax increases and spending cuts is scheduled to take effect at the beginning of 2013. This fiscal cliff, if not averted could spur an economic recession in US.

We think that “US fiscal cliff” issue is going to dominate the headlines for the rest of 2012, as it is more politically sensitive rather than economically oriented. We sense that US Congress will be compelled to reach an agreement on this, conferring to the views of the Republican counterparts. Eventually, the incumbent ruling party would kick the can down the road, implying that the reforms in the tax code and spending cuts would be procrastinated. 

We infer that gold prices will trade firm, as US dollar will remain under pressure due to persistence of Federal Reserve’s with easy monetary policy. Re-election of President Obama has ensured that Ben Bernanke will continue at the helm of the affairs for the apex body. Ben Bernanke has been a strong proponent of quantitative easing, which implies that general debasement of the dollar will likely continue moving forward, corroborating our positive stance on gold. In addition, strong physical buying in India ahead of the festive season should also enact as a prop for the yellow metal.

Gold Snapshot
  Oct-12 Sep-12 mom (%) Oct-11 yoy (%) YTD (%) Avg'12 Avg'11
*Price (US$/ounce)                
Spot Gold 1,721 1,772 (3) 1,715 0 7 1,662 1,573
COMEX Gold 1,719 1,771 (3) 1,725 (0) 7 1,663 1,572
MCX Gold 31,105 31,201 (0) 27,343 14 12 29,396 23,995
US Dollar Index 80 80 (0) 76 5 1 81 77
Spot INR 53.8 52.9 2 48.7 11 2 53.2 46.7
Source: Bloomberg, India Infoline Research 
* Prices as on 5
th November, 2012

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