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Tuesday March 27, 2012

Swings in gold prices to continue

PETALING JAYA: A better economic outlook and redemptions by gold investment funds has seen gold lose a bit of its shine over the past month.

Those factors point towards increased volatility for gold, which has risen in price as a safe haven commodity in recent years, but the spot price of the precious metal has dropped to US$1,660-US$1,670 an ounce from a recent high of US$1,784 on Feb 28.

Australia and New Zealand Banking Group Ltd senior commodities strategist Nick Trevethan said there were near-term risks for gold prices due to more fund redemptions towards the end of the current quarter.

“What we're seeing is a return in fund redemptions similar to what we saw in the third and fourth quarters of last year,” he said, adding that the SPDR Gold Trust, an exchange-traded fund, was sharply lower last Tuesday.

Reports last week noted that the appetite for gold and silver was noticeably lower as more positive US economic data on housing and building permits lessen the possibility of a third round of quantitative easing (QE3). However, US Federal Reserve chairman Ben Bernanke said last Thursday that spending was still too weak to support a faster pace of growth with gross domestic product expected to slow to under 2% this quarter after expanding 3% in the final quarter of 2011.

Trevethan told StarBiz that in the longer term, the speculation over the Fed implementing quantitative easing measures would still have an impact on gold prices.

He noted that a QE3 by the Fed was a decreasing likelihood and that “the markets had been over-hopeful of another round of quantitative easing”. Trevethan said the eurozone sovereign debt crisis should be in theory positive for gold since there was a close correlation between the value of the euro and gold prices.

“So far, we've seen gold prices dropping in tandem with the euro although on a net-net basis, we think it's positive,” he said, estimating spot gold to average US$1,700 before rising from the middle of the second quarter to US$1,830 by year-end.

Trevethan said the main support for gold prices would continue to be the buying of gold by the central banks of emerging economies as well as the demand for gold among Asian consumers.

He said central banks from emerging economies, which typically have 5% of their reserves in gold, was now looking to increase their holdings to around 15% and to do it over a 10-year period.

“This will mean increasing their holdings by another 22,000 tonnes but there's not enough supply for that and this have been going on for the last two years,” Trevethan said.

He said China would outstrip India in gold demand this year with probable demand of over 800 tonnes. “In Hong Kong, the typical Chinese tourist will buy 20 to 30 grammes of gold as this is for them a good hedge against inflation since the low interest rates of Chinese banks effectively eats away their savings,” Trevethan said.

Meanwhile Oversea-Chinese Banking Corp Ltd analyst Barnabas Gan said in an email reply that while the safe-haven demand for the US dollar would be limited given the economic recovery, there were potential headwinds in the making with slowing growth in China and lingering issues over the eurozone debt crisis.

“We do not disregard the possibility of a QE3 this year while also recognising that the hurdle for its introduction is higher,” he said, noting that despite the slightly bullish tone of the latest Federal Open Market Committee statement, the reluctance to hike benchmark interest rates suggests the Fed's recognition of the economic uncertainty.

Gan said financial markets would be looking for more action by the Fed as Operaion Twist (where the Fed sold short-term Treasury bonds and bought long-term Treasury bonds to induce long-term yields to drop, thereby bringing down borrowing costs) comes to an end in June.

He said the Fed would remain accommodative by keeping interest rates low until 2014 while gold's lure for investors could strengthen as high crude oil prices boosts the precious metal as an inflation hedge.

Gan said that on the technical side, the quick price adjustment suggests that gold could be entering over-sold territory and might prompt technical-minded market players to increase their holdings effectively raising prices above US$1,680.

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