Urge To "Dump Gold" Finished As US Fed "Turns Dovish", Diwali Begins

WHOLESALE London prices of gold sat tight Monday morning, holding onto Friday's 6-week closing high as European stock markets failed to continue a rise in Asian shares.

Silver was unchanged with commodities, major government bonds and gold, sitting at $22.58 per ounce by lunchtime.

The US Dollar rallied after hitting a new 9-month low on its trade-weighted index against major competitor currencies.

Gold last week enjoyed its strongest rise in almost 3 months, adding 2.6% as silver rose 2.9%.

"Gold's ascent above $1350, to one-month highs, has been driven by investor interest," says a note from Barclays Capital, pointing to the "largest daily increase" in exchange-traded gold funds, which give investors exposure to the metal's price without them taking physical ownership, since January.

Over the week as a whole, however, the largest gold ETF – the SPDR Gold Trust listed in New York (ticker: GLD), as well as in Hong Kong and other financial centers – saw its holdings drop 10 tonnes, hitting new 54-month lows of 871.

The GLD started 2013 with near-record holdings of 1,350 tonnes, before shedding 380 tonnes as prices crashed in the first half of the year.

"There's not much reason anymore to dump gold further," says one London trading desk in a note, "[not] while the US Fed renews its dovish stance after a miserable attempt at the medium-rare hawk side of things.

"In truth, the USA are cornered by a sluggish growth."

The US central bank begins a two-day meeting on Tuesday, announcing its monetary policy on Wednesday. Many analysts now expect it to stick with $85 billion of monthly quantitative easing.

Looking at short-term interest rates, now held at zero for almost four years, "the implied yield on the Fed funds futures contract for December 2015 has fallen from a recent peak of 1.45% percent to 0.65%," says Reuters, "highlighting that investors have scaled back rate hikes expectations in 2015 and beyond."

"There's no real indication," said Thomas Capalbo at New York brokers Newedge, speaking after Friday's weaker-than-expected US data, "that things are getting much better, and no indication saying that we are going to see tapering soon.

"So that's going to be beneficial for gold and probably silver too."

US regulator the CFTC is currently three weeks behind with its Commitment of Traders data for gold and silver futures, owing to this month's debt-ceiling shutdown.

Gold in India – the world's heaviest consumer nation – meantime held near record highs above international benchmarks on Monday, with the premium in Mumbai at $120 per ounce.

The peak gold-buying festival of Diwali begins on Saturday. After surprising market analysts with a small interest-rate rise in September, Reserve Bank of India governor Raghuram Rajan will announce the latest policy move on Tuesday.

"Impact of high gold premiums will be there on prices on the [start of Diwali] Dhanteras day," says Haresh Soni, chairman of the All India Gems & Jewellery Trade Federation, "because supplies have dried up in the absence of imports in the last three months due to government curbs."

Jewelry sales are stable from Diwali last year, says Soni, but sales of investment gold bars and coins are running at half 2012 levels.

Former president of the Bombay Bullion Association Suresh Hundia disagrees, says MoneyControl, putting India's jewelry sales down by 60%, with coin and gold bar sales 70% lower.

"Government has banned import of bars and coins," says Hundia. "So, there is no supply to meet the demand for such items on the festival day."

The Times of India today reports what it calls a "treasure trove" of mineral resources discovered in Uttar Pradesh, including up to 0.25 tonnes of gold.

India last year imported some 845 tonnes of gold to meet domestic demand.

Smuggling may have increased by 50% so far in 2013, reports the New Indian Express.

The number of Indian customs gold seizures is little changed from 2012, the Business Standard says, but the value of those hauls has jumped by well over 300%.

Over in China, meantime premiums on the Shanghai Gold Exchange briefly went negative overnight, recovering to $1.50 per ounce above London spot gold prices but down from this spring's record levels of $30.

Next month's planning meeting for Beijing's politburo will see "unprecedented" reforms, according to Yu Zhengsheng, the fourth-highest member of the Communist Party's Standing Committee.

Interbank interest rates rose again in Shanghai today, taking the annualized cost of 1-month money to 6.48%, the highest level since June's spike to double digits.

Adrian Ash

(c) BullionVault 2013

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