Gold Falls Below $1600 for First Time in 6 Months, "Sharp Move Could Trigger Stronger Demand"

By: Ben_Traynor

THE SPOT gold price dropped below $1600 an ounce for the first time in six months Wednesday, as the Dollar strengthened and stock markets were broadly flat, ahead of the publication of the latest Federal Reserve policy meeting minutes later today.

Silver fell to $29.19 an ounce, also a six month low, while other commodity prices were little changed on the day.

Major government bond prices fell, with UK Gilts dropping sharply along with the Pound following the latest Bank of England minutes.

Dealers in India reported an increase in gold buying today, with some citing next week's budget as a factor.

"Most people in the market are concerned about policy changes in the budget," one dealer in Mumbai told newswire Reuters this morning.

"Some sort of measures to curb gold imports can be there, that's why bullion players, especially jewelers, are increasing their stock levels."

Last month, India raised the import duty on gold from 4% to 6%, with authorities having cited gold imports as a factor exacerbating the current account deficit.

Over in China, trading volumes on the Shanghai Gold Exchange continued to fall Wednesday, having set a record on Monday as the exchange re-opened following Lunar New Year week.

"We have seen quite strong interest in the domestic market as prices weaken," says one trader in Beijing, "although such demand is unable to push prices much higher...once prices stabilize around this level, we may see demand dwindle. But another sharp retreat or rally in prices will trigger a lot of investment and physical gold demand."

Less than three months after setting a new all-time record, the Euro gold price fell below €1200 an ounce for the first time since December 2011 this morning.

The Pound meantime fell to a nine-month low against the Dollar this morning, dropping sharply immediately after the publication of the latest Bank of England Monetary Policy Committee minutes. The minutes show that three of the nine MPC members – including the current governor Mervyn King – voted earlier this month to increase the size of the Bank's quantitative easing program from £375 billion to £400 billion, with the majority voting to leave it unchanged.

"The Committee agreed that, as long as domestic cost and price pressures remained consistent with inflation returning to target in the medium term, it was appropriate to look through the temporary, albeit protracted, period of above-target inflation," the minutes read.

"The BoE minutes surprised on the dovish side," says Citigroup strategist Valentin Marinov, "which could be seen as disappointment for those thinking that a lot of negatives are [already] in Sterling price by now."

"This lowers the bar for further intervention," adds Deutsche Bank economist George Buckley, "though we still argue that if the BoE’s forecasts for sticky inflation and GDP growth gradually recovering are proved right no more quantitative easing will be needed."

Gold in Sterling jumped to £1048 per ounce immediately following publication of the minutes, slightly above the previous high for this week, before trading lower towards lunchtime in London.

The UK's three-month unemployment rate meantime rose to 7.8% in December, up from 7.7% a month earlier, data published this morning show, although January's claimant count figure fell by more than anticipated.

In the US, the Federal Reserve publishes the minutes of last month's Federal Open Market Committee later today.

"The Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens," said the statement published immediately after that meeting.

"We suspect the [Fed] will again spell out its prolonged easing stance in very clear terms," says Ed Meir, analyst at brokerage INTL FCStone, "but whether this is going to be enough to trigger a round of renewed [gold] buying is doubtful."

"We don't think there should be anything in the minutes to spook the markets," adds Standard Bank currency strategist Steve Barrow, "[but] we definitely sense that the market is more sensitive to hawkish comments [implying tighter policy] than dovish ones."

Ahead of the Italian elections starting on Sunday, former prime minister Silvio Berlusconi's party has sent out thousands of letters to voters pledging to reimburse their IMU property tax. The letter told voters that should Berlusconi become economy minister, they will be able to collect their tax rebate from the post office.

"Silvio Berlusconi may be an effective campaign strategist," German finance minister Wolfgang Schaeuble said last week, "but my advice to the Italians is not to make the same mistake again by voting for him."

Despite recent weakness in the Yen, Japan's trade deficit set a new record last month, figures published Wednesday show.

By Ben Traynor
BullionVault.com

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.(c) BullionVault 2013

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