Gold prices recovered sharply on Tuesday, jumping 1 percent as three days of losing streak, in which metal slumped more than 2 percent, attracted bargain hunters even as physical side demand picked up in Asia, particularly from China as Jewelers looked to capitalize on weaker prices and stock up metal before the Chinese New Year.
Gold also received support from the news that Bank of Japan is pondering over further economic stimulating measures in order to arrest deflation, boosting metal’s inflation-hedge appeal.
Gold futures for February delivery gained $15.90 an ounce or 1 percent to close at $1,662.20 while spot gold edged up 0.8 percent to settle at $1,666.20 an ounce.
The SPDR Gold Trust (ETF) (NYSE: GLD
) ended the day 0.71% higher at $160.56.
Nevertheless, prices are likely to remain capped in the short to medium-term as investors will remain suspicious on the continuation of Federal Reserve’s quantitative easing measures. Last week, minutes released from the Federal Reserve’s latest policy rate meeting showed that policymakers were extremely concerned over the massive asset purchase program from financial markets. Speculation is rife that sooner or later, the central bank might scale down or halt its QE3 which in turn impact yellow metal’s inflation hedge appeal.
In a note to investors, Bart Melek, head of commodity strategy at TD Bank, said, “Gold could certainly test its $1,625 support again, with prices drifting materially below the $1,600 mark if there is more talk of an early stop to QE (quantitative easing) in the coming days.”
Federal Reserve’s sustained and rampant currency printing and an environment of record low interest rates were the key factors behind gold’s bull runs since 2008 as investors fearing spike in inflation owing to currency debasement sought safety in inflation-hedge bets.
Gold prices could face more pressure in case those investors who had taken safe-haven bets in the backdrop “fiscal cliff” standoff among the Congressional leaders, choose to unwind, believes Melek.
Meanwhile, the European Central Bank’s policy rate meeting, scheduled to be held on Thursday is also keenly anticipated. According to Andrey Kryuchenkov, an analyst at VTB Capital, gold’s rally is very unlikely to last as investors will be jittery ahead of the policy rate meeting. Should the ECB hint at any further deterioration of the euro zone economy in 2013 then the euro will come under pressure, making dollar-priced commodities more expensive for traders dealing in the euro zone’s common currency.
Physical Side Demand Improves In Asia
The demand for physical gold improved significantly in Asia after the metal slumped to its 4-1/2 month low in the last week. The trading volume on the Shanghai Gold Exchange's 99.99 gold physical contract hit record levels on Monday, according to Reuters.
With holiday season (Chinese New Year just around the corner in mainland China, the demand from Jewelers also picked up. A data release from Hong Kong Census and statics Department showed that Hong Kong exported 90.763 tons of gold to mainland China in November, a 91 percent jump from the same period in 2011.
“The increase in seasonal demand is good for gold and offsetting fundamental weakness elsewhere. Otherwise, the ongoing gold correction would be more pronounced,” said said Jeff Wright, managing director at Global Hunter Securities.
Demand from India, which is also one of the world’s top consumers of gold, increased lately. According to Reuters, premiums on gold shipments to India climbed to their highest in two months on Tuesday.
In some other precious metal markets, silver futures for March delivery edged up 38 cents an ounce or 1.3 percent to close at $30.47. Platinum futures gained $26.90 or 1.7 percent to settle at $1,583.20 while palladium futures slipped $2.15 an ounce or 0.3 percent to end the day at $667.85.