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A week in gold; Dollar rally ends recovery

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Gold slipped in the run-up to the weekend as the US dollar’s renewed strength and more selling by institutions eroded gains seen earlier in the week.

At one stage Tuesday, the metal price threatened to go above US$1,480, a level seen by technical followers as an important bullish indicator but by Friday the momentum was firmly downwards again.

Gold traditionally moves the opposite way to the dollar  and the US dollar index, a basket of six major world currencies weighted against the US currency, hit a two-week high on Thursday.

Spot gold tumbled US$34 to US$1,423 as the US currency made gains against a whole raft of other currencies.

Reports the US Federal Reserve may soon end its current quantitative easing programme added to gold’s unease as it followed better than expected initial dole claimant numbers and seen as another good sign for the US economy.

The news overshadowed reports that there was an increase in the amount of gold held in exchange traded funds for the first time in five weeks on Thursday.

Sales of gold by holders of ETFs have been a major drag on the price of gold since the start of the year.

One of the big sellers reportedly has been hedge fund manager John Paulson’s Gold Fund, a major holder in SPDR Trust. 

According to Bloomberg, citing sources close to the fund manager, the Paulson Gold Fund shed 27% of its value last month and is down 47% in the year to date so far. 

The amount of gold held in the SPDR Trust, the largest of the gold-backed ETFs, fell to close to a four-year low during the week.

Offsetting this has been continued strong physical demand and traders say gold is now in the middle a two-way pull with selling by large institutions worried by its poor performance relative to other assets such as equities offset by feverish, almost panic buying by consumers in India and China. 

Physical demand is set to remain strong said Investec, which noted the seasonally stronger period for jewellery demand is also approaching.  Imports into India are already said to be running at five times average levels.

If ETF holdings do start to turn, the strong demand for bars, coins and jewellery in Asia currently could be supportive for gold in the months ahead, Investec suggested.

Another broker, BNP Paribas, cut its price target this week, however.

BNP sees the gold price averaging $1,580 a troy ounce in 2013, 5% lower than its previous forecast and predicts a further drop to $1,520/oz in 2014. 

The French bank expects the US Federal Reserve to continue its quantitative easing program until early 2014, which may provide a prop to the price later in the year.

"The injection of liquidity will weaken the dollar, which is positive for gold as demand for real assets denominated in US dollars will rise," BNP said.

"Equally, a weaker dollar is likely to invite central bank buying as a means of diversifying reserves, as did Russia, the Philippines and Brazil in 2012."


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