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Commodities Wrap

Bernanke may not understand gold, but ppl continue to buy

Gold finished up again Friday, with the most-active market of August adding $8.70 from prior settle to end at $1,292.90 at the close of outcry trading -- its highest level in a month -- the day after Federal Reserve Chairman Ben Bernanke admitted that he didn't really understand gold prices.

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Gold finished up again Friday, with the most-active market of August adding $8.70 from prior settle to end at $1,292.90 at the close of outcry trading -- its highest level in a month -- the day after Federal Reserve Chairman Ben Bernanke admitted that he didn't really understand gold prices.

During his testimony before the Senate Banking Committee on Thursday, the central bank boss said: “Nobody really understands gold prices and I don’t pretend to understand them either.”

Rarely has a truer word been spoken.

The recent volatility of the yellow metal is ascribable at least in part to the constantly changing interpretation of signals from the Fed on the fate of its $85 billion per month bond buying program and the timing of its inevitable end, the constant will-he/ won’t-he that has Bernanke’s every move tracked by devoted followers and his every utterance dissected and analysed for meaning by a watchful market.

Typically, the metal follows in lock step, sinking on every suggestion that the program of bond purchasing might be reaching its end, and rising on every reiteration that there is no plan to wind anything back just yet.

Much as the program and its inevitable end is treated as a bellwether of sorts for gold, a plethora of other factors come into play in determining the mood of the market and its level of enthusiasm for the yellow metal, among them the fortunes of the greenback; the strength of physical demand; exchange-traded fund flows; various predictors of inflation; the health of equities markets and the general economic outlook on both a regional and global level.

On Wednesday, in his testimony to a congressional panel, Bernanke took a dovish stance, saying that the timetable for tapering was “by no means on a preset course” in that the asset purchases were dependent on economic and financial developments.

The chairman also spoke of inflation risks, saying that the job situation is "far from satisfactory", despite gradual improvements to the labor market. He said the central bank intends to maintain a high degree of monetary accommodation "for a considerable time" after the stimulus ends, referring to the short-term rates. He said the Fed was planning to keep these rates close to zero for at least as long as the unemployment rate remains above 6.5 per cent, and that that level was a threshold rather than a trigger. The day saw gold futures drop as the dollar gained.

On Thursday, he reiterated that a decision on tapering would be contingent on a re-invigorated labour market and other favourable data, which in the month since the Fed’s mid-June meeting had been mixed, adding that it was too early to tell whether the central bank would slow its bond-purchasing program at its September meeting, in essence leaving the door open to tapering commencing in the later months of this year. 

Despite better than expected U.S. weekly jobless claims at 334,000, an event which typically invites a round of taper speculation and subsequent drops in the price of gold, the metal still ended higher on Thursday.

Meanwhile, demand from China remains strong, with the Asian giant set to surpass India for the spot of world’s number one consumer of the yellow metal, possibly as soon as this calendar year. The sharp decline in price has seen demand for physical gold rise, particularly in China and Japan -- recent data from the Shanghai Gold Exchange showed that it supplied 1,098 metric tons in the first half of 2013, which is close to the 1,139 tonnes for the whole of 2012.

“The proof is in the pudding,” says president and CEO of Toronto’s Maison Placements Canada, John R. Ing, of gold’s continuing appeal. “Eight central banks have added to their reserves this year. There is some concern that if the majority of reserves is held in US paper and US paper is being reproduced ‘til infinity that lessens its value and therein lies the major appeal of gold. To me, they’ve lost control and they’re trying to get control back again, which is another reason one should hold gold – because of central bankers losing control.”

“Gold is independent of government policy and that is the reason central banks conventionally view gold with alarm, because they can’t control it. Meanwhile, people continue to buy it as a store of value.”

This weekend brings the G20 meeting, which will be closely monitored for any announcement related to the Fed’s stimulus plans. The week ahead will bring July’s flash manufacturing PMI for China, the E17 and the U.S. Also due this week is the July Germany IFO business climate index, the June U.S. durable goods order, and the June Japan CPI on 25 July. 

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