Gold hits 1-month low pre-Fed, Asian stockpiles cut bar demand outlook in half

London prices for wholesale gold slipped to one-month lows at $1,334 per ounce Thursday lunchtime, extending an early $20 slump in what one dealer called "anaemic trade."

European stock markets reversed morning losses, and crude oil rallied, as the U.S. and Russian foreign ministers met in Switzerland to discuss Syria's chemical weapons.

Gold priced in Sterling fell to a five-week low beneath £846 as the British pound held near seven-month highs on the currency market.

Silver meantime dipped below $22.50 per ounce, down almost 6% for the week so far.

"Gold's massive trading volumes in mid-year will now dwindle," says the latest Gold Survey Update from Thomson Reuters GFMS, because inventories amongst the world's heaviest consumer nations are already "generally heightened" following the surge in re-stocking during 2013's price crash.

"India is the exception, [because] changes in import and distribution rules have meant that inventories generally are low, while smuggling is on the increase," says the report.

Overall, and even with the world's former No.1 consumer being eclipsed by China in 2013, GFMS is now expecting "a tangible contraction" in jewelry fabrication and perhaps a 50% drop in gold bar demand worldwide during the second-half of the year.

For professional investors, and "as geopolitical risks fade," Bloomberg quotes chief investment strategist Wang Xiaoli at CITICS Futures, China's largest brokerage by market value, "the focus is shifting back to QE and the Fed meeting next week.

"We expect the market to remain volatile till then."

With the U.S. Fed widely expected to start tapering its quantitative easing program next week, "The one thing I would say is that we should expect volatility," agrees Peter Sands, CEO of Standard Chartered Bank, speaking to CNBC at the World Economic Forum in Dalian, China. "When you have that degree of intervention, stopping it is not going to be a smooth and simple process."

"I don't see a short-term crisis in emerging Asia," said IMF deputy director general Zhu Min at the same conference, noting concerns over the impact of Fed tapering on developing economies.

Credit ratings agency Moody's today warned that the plunging Rupee, widely blamed on the approach of Fed tapering, would hurt the ability of Indian companies to borrow.

"The situation is very different from 1997," Zhu countered. "[But] if a country has payment problems, our job is to maintain global financial stability."

"The gold market is expecting tapering next week from the Fed," said Bank of America Merrill Lynch metals strategist Michael Widmer in an interview Wednesday. "If the Fed delays or doesn't do it all, gold could rally."

But longer-term, real interest rates are rising, says Widmer, and inflation expectations are low. "So why hold gold? I would sell into that rally."

Writing late Wednesday, the "short-term uptrend line [in gold] could be taken out if prices dip below $1350," said analyst Edward Meir at brokers INTL FC Stone.

"In addition, downside bets seem to be increasing" on the gold futures and options market.

Data on speculative gold contracts last week showed hedge funds and other non-industry players cutting their bearish bets by 60% from July's 13-year peak.

The number of bullish bets held by speculative traders in US gold futures and options rose only 11% over those two months, however.

"We would read any tapering of less than $10bn per month as bullish relative to where gold is now," said South Africa's Standard Bank in a note Wednesday, "while tapering of more than $15bn would [be] bearish."

Cutting the Fed's $85 billion in monthly QE "may weigh on gold," agrees bullion market maker HSBC. But "an emphasis by the Fed to keep [its short-term interest] rate low may help off-set some of bullion's potential losses."

About the Author
Adrian Ash

Adrian Ash runs the research desk at BullionVault. Formerly head of editorial at Fleet Street Publications – London's top publisher of financial advice for private investors – he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to a number of investment websites.

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