The ones who are constantly in touch with the world markets especially precious metals know that the driving force behind gold and the main reason for its volatility between 2008-2011 has been the:
• FOMC’s policy
• Falling long term treasuries rates
• Higher risk of economic slowdown
• Fear of inflation.
Initially all eyes would be glued to the US markets as any one step from this government would create volatility for gold. But nowadays, apart from the US markets it’s the Japanese, Chinese and Euro market that also played an influential role for gold. The economic indicators from these economies have also influenced gold prices to quite some extent.
This week the markets remained calm over the long Thanksgiving holiday, and there was not much volatility for gold and silver in international markets. Interestingly however the gold forwards have tightened significantly in spite of weak physical demand and ETF outflows, down 20k to 51.96 million ounces.
Apart from this the decision on Swiss referendum on gold holdings is also being long waited for. Looking back, Switzerland was the last country in the world to leave the gold standard in 1999 and may be the first to take a major step to becoming a gold-backed currency. One fifth of Switzerland’s 1040 tonnes of gold reserves are in the vaults of The Bank of England while a third are deposited in the Canadian Central Bank.
Under the ‘Save Our Swiss Gold’ initiative the SNB will have to hold at least a fifth of its assets in gold within five years. The bank will also be required to repatriate all Swiss gold held abroad and be banned from selling any of its holdings in future. Speculation that Switzerland could vote in favor of a motion to raise its gold reserves had strengthened prices. But finally on Sunday, a No Vote was passed which could create some ripples in the markets.
During the week, recent strong U.S. data had fueled talks that the Federal Reserve could soon raise interest rates, depressing gold. But the contradictory reports released on Wednesday showed domestic personal spending grew slightly less than forecast in October, while U.S. jobless claims rose to their highest since September and new orders for U.S.made capital goods fell for a second month in October Thus pushing gold prices up.
Apart from the Swiss and US, data that came in as a surprise package for gold was the easing of curbs from the Indian government. In a move that is likely to bring cheers to traders as well as customers, India eased the restrictions on gold imports by withdrawing the 80:20 schemes.
Under the 80:20 norm, put in place in August 2013 to curb high gold inflows that was widening the current account deficit, at least 20 per cent of the imported gold had to be mandatory exported before bringing in new lots. With this move by RBI, they expected that gold will be kept back at home and thus improve supplies for the domestic market which will further bring gold prices down. Though the policy supported their idea of arresting Current account deficit but in turn created unprecedented growth of illegal channels that support Gold imported in the country.
This move by RBI is to acknowledge the fact the CAD has reduced and even the Oil price has declined by almost 30% by what it was two months ago. I feel this is a really good move by the government. This will reduce the cost of Gold and procedural issues that the companies were facing with regards to Gold imports.
Though gold showed mixed trends this week, there are players in the market who still believe that the sentiment for gold is bullish over the longer time frame.
Following are a few reasons for this belief-
• Slowing of the ETF sales and outflow
• Seasonal demand from India after the onset of festivals and marriages India has witnessed a 100 tonne plus season consumption of gold.
• Rising demand for gold is expected from China ahead of the Chinese New Year where gold is purchased heavily in the Chinese
• With executive board member Yves Mersch commenting that gold buying could be part of the asset-purchase program, expectations and, therefore, demand may rise due to potential ECB investment in the yellow metal.
So once again it’s the bull v/s the bear market for gold and would be too early to comment. Now we need to wait for the market to further react to the easing of the 80:20 schemes and the Swiss Referendum.