All eyes looking ahead to Fed meeting next week, while Syrian crisis keeps bullion underpinned
Gold fell slightly Monday, closing under $1,390 as U.S. Secretary of State John Kerry downplayed a potential attack on Syria as an "unbelievably small, limited kind of effort.""The biggest factor in gold right now is this Syrian situation,"RJO Futures broker Phil Streible said Monday. "We're going to have President Obama come out and speak tomorrow a little more about it. And if there's any indication that this thing is going to move forward, you should see that bid under gold prices pushing it up through $1,400. Now if talks start to fall apart, it doesn't look like he's going to get any kind of support, we're probably going to come back and retest that $1,350."
Fed policymakers meet Tuesday
Also keeping gold in check were market expectations that theFederal Reserve might taper its monetary stimulus at its Sept. 17-18 policy meeting. Although last Friday's nonfarm-payrolls report was largely seen as abysmal, many analysts said it wasn't quite bad enough to keep the Fed from trimming its $85 billion monthly mortgage bond-buying program, a key
supporter of both stock and bullion prices.
"Heightened geopolitical tensions regarding Syria have contributed to gold's recent strength," Barclays analyst Suki Cooper said. "Although the weaker-than-expected nonfarm payrolls data provided a boost to prices, our economists believe the report was sufficient to greenlight a tapering of Fed asset purchases this month."
"The idea that an exit from 'QE3' might begin next week is by no means off the agenda yet in the eyes of market participants, which is likely to make it difficult for gold to rise above the $1,400 per troy ounce mark in any lasting fashion over the next few days," wrote commodity analysts atCommerzbank.
Taper or no taper, gold "is a buy"
Still, some analysts think tapering will only be a speed bump for gold over the long run. "Gold is cheap. As Marc (Faber) said, the correction in gold was extraordinarily large," Family Office Research and Management partner Thomas Murphytold CNBC. "The correction in gold was premised on the belief that the U.S. dollar will strengthen as interest rates rise, thereby attracting capital into the U.S. dollar. It's probably been overdone at this stage. ... We don't try to change our gold positions based on this quantitative easing timing, because the tapering is going to occur. Sometime in the next two months the Fed is going to tell us that instead of buying $85 billion a month in bonds they're going to buy $60 to $70 billion. That small announcement is very significant because it's the beginning of a staircase of similar announcements. That actually will hurt gold temporarily, but the value of gold is fundamentally strong, and it is a buy. … There are a number of ways to acquire gold exposure, but I would not have a portfolio without gold exposure at this point."
Even if tapering does occur, the Fed has no intention of raising interest rates anytime soon, and that's amazingly bullish for gold prices. San Francisco Fed chief John Williamssaid a rise in interest rates may not come until the second half of 2015, and he said he does not expect the Fed to raise interest rates as soon as the unemployment rate hits 6.5%.
Inflation is coming, economist says
All of this easy money will have to create inflation at some point, and that's why investors need precious metals in their portfolios. "It is not possible to keep real short-term interest rates negative for this long in the face of even modestly positive real economic growth without generating financial imbalances and inflationary excesses down the road,"Gluskin Sheff economist David Rosenberg wrote in theFinancial Times.
"The Fed and other central banks are hardly going to be touching short-term interest rates, which will remain negative in real terms for years. So financial repression will remain the order of the day, until the Fed gets what it wants -- which is inflation expectations heading up to 2.5%." The upshot of such a policy? A 30% increase in consumer prices over the next 10 years.
Rosenberg added: "This surreptitious default move is one peg in the restoration of a more comfortable debt-to-GDP ratio. But the policy-driven move towards higher inflation will help devalue the outstanding real level of what are still huge liabilities. That is not price stability: it is more bad news for pensioners and those who live on fixed income investments, and good news for Uncle Sam and other debtors."
Gold demand "extremely strong" in Asia
Another bullish driver for gold is India's wedding and festival season, which is getting under way. Indian jewelers expect a surge in gold shipments this week after the customs department issued new import guidelines on Wednesday. Previously imported stocks had become stuck at Mumbai airport due to a lack of clarity on rules.
ETF strategist Dave Mazza of SSgA confirmed that gold buying in India and China has remained robust. He also predicted some potential turbulence ahead for the U.S. dollar, in an interview with Index Universe:
"We're at an interesting junction in the gold market. The April sell-off was driven by a confluence of events, and technicals did have some influence. And now that we've seen some stabilization in price -- particularly that rebound in July -- we're at a more natural base of the price of gold.
"Going forward, we know over the long run that gold is driven by a unique set of fundamentals. The influence of the jewelry market is actually the largest. There's also sizable investment demand both from ETFs and from bars and coins, and then the influence of central banks.
"What we have seen this year, in particular, is the shift of demand from the West to the East. And while there has been well-documented selling by ETF investors, the physical bar and coin market is extremely strong in the two countries that have most recently been the biggest driver of gold price, India and China.
"India's currency, the rupee, has been under some pressure of late, which has impacted the ability of investors to purchase gold. But we're moving into a historically strong demand for gold in those markets for the holiday season. I would expect that to be a source of pretty strong demand.
"Going into the later part of this year and into next year, the role of inflation expectations for the dollar -- while not directly transferred to fundamentals like jewelry and investment demand -- I think will play a sizable role in the price of gold. The dollar has been extremely strong relevant to other currencies for the better part of this year.
"We believe the U.S. economy will grow at a decent pace this year and then pick up even greater next year. The fact of the matter is, though, that we're going to be entering a potentially more volatile period for the dollar because of issues around the budget negotiations and around the Fed chairmanship."
$1,400 remains gold's short-term baseline
In the short term, however, iiTrader CEO Rich Ilczyszyn saidgold could possibly remain rangebound heading into the Fed's meeting next week, as traders stay cautious:
"It is the announcement from this meeting (which we will get on Wednesday, Sept. 18) that will finally give us some clarity on when the Federal Reserve will begin to taper its easing program, and by how much. …
"The lowest marked close last week was $1,373, and we believe this brings the $1,373 to $1,401 range back into play. Only the unlikely event of a close outside of this range will provide the market with momentum in either direction.
"Furthermore, it will take a close above $1,422.30 to spark a bull leg up to $1,480. And if we see a close below that key $1,352 level, it will spark a bear leg down to $1,300."
More information can be found online at http://www.goldbullionadvisors.com
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