Gold Monthly Update : Spanish bailout could extend the upside trend - September 2012

In US, gloomy remarks by Ben Bernanke at the on US economy set the stage for further quantitative easing.

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

Gold prices breached the psychological levels of US$1,700/ounce during September after the gap of literally six months and have sustained above the US$1,750 levels for the past few weeks, thanks to monetary policy initiatives by the central banks across the globe. At the onset of this month, ECB announced unlimited purchases of short term sovereign debt. Sovereign bond purchases would be done through sterilization process, implying that an equivalent amount of money will be taken out of the system itself in order to buy the bonds with the maturity up to three years. In addition, bulls got a sigh of relief from the verdict of the German constitutional court, declaring that the regional permanent rescue package (European Stability Mechanism) is a legitimate instrument.

In US, gloomy remarks by Ben Bernanke at the on US economy set the stage for further quantitative easing. Eventually, US Federal Reserve policy action enacted as an icing on the cake for the gold bugs. The apex body has decided to expand its balance sheet aggressively. Fed will initiate additional monthly purchases of US$40bn per month in new mortgage debt instruments. These additional purchases would be open ended and would continue until labour markets show any concrete signs of improvement. In addition, the apex body will continue its Operation Twist plan to replace short-term securities on its balance sheet with long-term bonds. The combined actions will together expand the Fed’s holdings by roughly US$85bn per month through the end of this year.

Joining the bandwagon, Japan’s central bank unexpectedly announced that it would expand its asset-purchase fund by US$126bn. The bank also said it will abandon minimum yield targets for its monthly government-bond purchases, implying negative yields on Japanese debt.

At this juncture, the complex is under moderate pressure as uncertainty looms over Spanish debt situation. Pressure is mounting on Spanish PM to resort for bailout due to deteriorating economic conditions. Conversely, Spanish PM stated that nation is not contemplating at a bailout just yet, which implies that the ECB will not buy any Spanish debt imminently.

Gold prices are persistently flirting with 2012 high of US$1,793/ounce, however have not been able to breach it on a closing basis. Nervousness about Spain continues to weigh on the broader markets. Looking forward, we infer that Spain would eventually request European central bank to buy its sovereign bonds, in spite of the domestic political implications the incumbent regime could face. Prevalent deadlock could lead to an uptick in Spanish sovereign bond yields and ultimately compel the nation to resort for a bailout from the ECB. In such an event, Euro could strengthen further and effectuate a broad based rally in the precious metals complex. However on the domestic front, therein lies a caveat as appreciating Indian rupee could offset the gains in the overseas markets. Indian rupee seems to extend its upside aided by strong tone in equity markets and better FII inflows.

Gold Snapshot
  Sep-12 Aug-12 mom (%) Sep-11 yoy (%) YTD (%) Avg'12 Avg'11
*Price (US$/ounce)                
Spot Gold 1,772 1,656 7 1,624 9 13 1,654 1,573
COMEX Gold 1,771 1,655 7 1,620 9 13 1,655 1,572
MCX Gold 31,201 30,837 1 25,989 20 14 29,198 23,995
US Dollar Index 80 82 (2) 79 2 (0) 81 77
Spot INR 52.9 55.6 (5) 49.0 8 (1) 53.2 46.7
Source: Bloomberg, India Infoline Research  
* Prices as on 28
th September, 2012

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