Gold prices underpinned by delay in QE tapering and Indian festival demand

The U.S. Comex gold futures (COMEX:GCZ13) spiked 2.04% on Tuesday while the prices have jumped 3.66% last week. Month-to-date, the gold futures have risen 1.21% after slumping 4.96% in September. The Dollar Index (NYBOT:DXZ13) fell 0.58% on Tuesday to 79.23, following a 1% fall on Oct. 17. The Euro/Dollar is approaching a two-year high, ending at 1.3781 on Tuesday. The S&P 500 Index traded at an all-time high at 1759.33 on Oct. 22. The Euro Stoxx 50 Index has risen 0.41% in the past two days and has jumped 5.37% this month. The U.S. 10-year government bond (CBOT:ZBZ13) yield plunged nine basis points on Tuesday and has dropped further during Asian open on Wednesday morning.

Delay in U.S. QE Tapering Expected

The 16-day partial shutdown of the U.S. government may have cost the economy $24 billion, said the credit rating agency, Standard & Poor's. In September, the U.S. added only 148,000 non-farm payrolls versus the expected 180,000, indicating a slowing momentum of the U.S. recovery ahead of the government shutdown. Last week, China reported a 7.8% year-on-year growth in Q3 compared to 7.5% in Q2, a jump of 2.2% from the previous quarter. In the U.K., housing prices surged ten percent in October, showing a rising economic momentum. Gold prices reacted positively to the prospect of a delay in U.S. QE tapering. A Bloomberg survey reveals a median forecast of expected and delayed first tapering in March 2014 by $15 billion.

ETFs Redemption and Indian Gold Premium

While gold prices have jumped in the short-term, the gold-backed ETF holdings, now at 1,889 tons, have continued to drop, falling 2.4% this month and 28.5% this year. On the other hand, the gold premium in India has reportedly surged to $120 this month compared to a discount of $60 in September. The government has raised import taxes three times this year to curb the gold import demand and the current account deficit. A significant drop of import demand from $16.5 billion in FYQ1 to $3.5 billion in FYQ2 suggests that substantial gold smuggling has occurred, ahead of the peak wedding and festive season next month. It appears that the government cannot change the gold-loving culture in India.

About the Author
Austin Kiddle

Austin Kiddle is a director of the London-based gold broker Sharps Pixley Ltd.

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