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Gold Prices Underpinned by Expected Delay in QE Tapering and Indian Festival Demand

The U.S. Comex gold futures spiked 2.04 percent on Tuesday while the prices have jumped 3.66 percent last week. Month-to-date, the gold futures have risen 1.21 percent after slumping 4.96 percent in September. The Dollar Index fell 0.58 percent on Tuesday to 79.23, following a one percent fall on 17 October. The Euro/Dollar is approaching a two-year high, ending at 1.3781 on Tuesday. The S&P 500 Index traded at an all-time high at 1759.33 on 22 October. The Euro Stoxx 50 Index has risen 0.41 percent in the past two days and has jumped 5.37 percent this month. The U.S. 10-year government bond yield plunged nine basis points on Tuesday and has dropped further during Asian open on Wednesday morning.

Delay in U.S. QE Tapering Expected

The 16-day partial shutdown of the U.S. government may have cost the economy $24 billion, said the credit rating agency, Standard & Poor’s. In September, the U.S. added only 148,000 non-farm payrolls versus the expected 180,000, indicating a slowing momentum of the U.S. recovery ahead of the government shutdown. Last week, China reported a 7.8 percent year-on-year growth in Q3 compared to 7.5 percent in Q2, a jump of 2.2 percent from the previous quarter. In the U.K., housing prices surged ten percent in October, showing a rising economic momentum. Gold prices reacted positively to the prospect of a delay in U.S. QE tapering. A Bloomberg survey reveals a median forecast of expected and delayed first tapering in March 2014 by $15 billion.

ETFs Redemption and Indian Gold Premium

While gold prices have jumped in the short-term, the gold-backed ETF holdings, now at 1889 tons, have continued to drop, falling 2.4 percent this month and 28.5 percent this year. On the other hand, the gold premium in India has reportedly surged to $120 this month compared to a discount of $60 in September. The government has raised import taxes three times this year to curb the gold import demand and the current account deficit. A significant drop of import demand from $16.5 billion in FYQ1 to $3.5 billion in FYQ2 suggests that substantial gold smuggling has occurred, ahead of the peak wedding and festive season next month. It appears that the government cannot change the gold-loving culture in India.

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23 Oct 2013 | Categories: Gold

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