Gold opens quarter up, but weighted by physical demand

In the Lead: “Factoring in China’s Factories”

The first session of the new quarter commenced on an upbeat note for all of the precious metals, save gold, this morning. The yellow metal opened on the weak side, showing a bid-side quote at $1,665 as against a marginally higher US dollar (79.01 on the index) and a fall of 50 cents in black gold. Attempts to lift gold beyond resistance at $1,680 or $1,700 could still be in the cards this week, with a potential target of $1,730 or so. On the support-side, the $1,650 and $1,620 levels are being cited as key numbers that need to hold. Overall, the speculative trade is still concerned about the potential slackening of physical gold demand from key consuming nations such as India and Turkey and about waning investment demand.

Despite certain optimistic reports to the contrary, we cannot confirm that the two-week-old strike by Indian jewelers has concluded yet. Estimates are that India only took in perhaps as little as 20 or 25 tonnes of gold in March. While some observers feel that India could all but lick its current account deficit figure by virtually halting gold imports, others opine that punitive moves (tariffs, etc.) on gold are “too little, too late.”

The Business Standard’s Devangshu Datta notes that “the enhanced customs duty on gold is designed to dissuade imports. Indian households have a default tendency to hoard gold. The Finance Minister has a delicate task in setting customs rates. If the rate is too high, there would be an incentive to smuggle. It’s easy enough to buy gold cheap in the Gulf and land large quantities on West Coast beaches. This happened daily in the old days of the Gold Control Act. That legislation created the legendary dons of what was then Bombay.” To be continued…

The tally of speculative positioning in the markets showed a bit of an improvement in the net speculative length in gold, which, according to this morning’s analysis by the team over at Standard Bank (SA) is still relatively weak and is running some 158 tonnes below the average of 2012. SB analysts are thus hesitant to call the futures market in gold as “bullish” just yet. The bulls continue to pray hard that the US economy show signs of faltering, which, in turn, would motivate the Fed to swiftly unleash some type of ‘unsterilized’ QE3 and that such a move, would, then, make for the attainment of a $2,000+ per ounce gold price target.

Their prayers have not been answered thus far, and the market’s recent “gyrations” unfortunately underscore just how over-dependent on the Fed the situation has become in gold. The perma-bulls appear to be ignoring (for the time being) other facts and figures that have quietly crept onto the scene. Take for instance the best Q1 gain by the S&P 500 since 1998 – a development that propelled US equities above gold for the first time in over a decade. Connecticut-based Birinyi Associates believes that “the problem with gold now is that people are starting to accept the economy [sic] recovery.”

Barclays Capital Commodity Research noted that “gold is also lacking sufficient investment enthusiasm to be able to sideline the physical market as it did earlier in the year.” Recall that last week Swiss bank UBS cut its gold price forecast by 18% for this year. This morning, a more modest but still meaningful 5.4% trimming of same was done by BofA Merrill Lynch. The bank reduced its gold projections to $1,750 per ounce while at the same time it raised its forecasts for silver, platinum, and palladium.

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