Gold Prices Edge Higher on Monetary Easing Expectations

Gold prices climbed up on Tuesday, crossing $1,620 an ounce level as slowing U.S. economy along with series of gloomy economic data from around the world has lifted investors’ expectations that central banks might provide economic stimulating measures through monetary easing.

Whenever central banks boost the money supply by cutting interest rates, gold prices edge higher on account of inflationary pressure in the economy. The yellow metal is the most favored hedge against increasing prices.

Furthermore, yellow metal’s inflation-hedge appeal also got more burnished when crude oil prices rallied sharply on Tuesday amid rising tensions over Iran’s nuclear program while a drought in the Midwest resulted in a sharp increase inn grain prices.

The bullion has jumped by 5% in last two sessions following a dismal manufacturing report for June, and although the factory orders data reported by the Commerce Department showed reasonable growth, analysts say that trend in growth is softer this year.

Now all eyes are focused on U.S. non-farms payroll data, scheduled to be released on Friday. Should the June’s job data show any weakness like the one it did in May, gold investors could get a hint on next possible course of action by the Fed.

However, any immediate QE3 looks unlikely, according to Dominic Schnider, an analyst at UBS wealth management, Singapore.

While speaking to CNBC-Reuters over this matter, he said, that although recent economic indicators would suggest that there are strong chances of fed providing some quantitative easing; any immediate change in policy is unlikely to come due as fed recently extended its “operation Twist” program.

“We are unlikely to see a big add-on after Operation Twist was extended, unless things fell off the cliff. And remember, when things did fall off the cliff in 2008, gold fell as well,” he cautioned, speaking to Reuters.

Fed’s operation Twist involved selling short term securities to buy longer term securities, a move aimed at keeping long-term borrowing costs low.

Spot gold climbed up 1.4 percent to $1,620 an ounce earlier Tuesday. U.S. gold futures contract for August delivery added $24.10 on Tuesday to close at $1,621.80.

The SPDR Gold Trust (ETF) (NYSE: GLD) ended the day 1.53% higher at $157.46.

Physical Side Demand Weak

Asia’s physical gold market remained muted after short-lived enthusiasm late last week when bullion slumped below $1,550 per ounce before posting a 3-percent rally.

According to one Singapore based dealer and Reuters, “Customers went in to pick up gold below $1,560 last week but now the market is quiet again.” He also said that that gold bar premiums were about 70 cents above London prices.

Meanwhile in India, world’s biggest importer of gold– a rally in the rupee against the dollar last Friday helped gold purchases from India. Demand for gold in India remained muted for almost 3 months due to falling Indian rupee against the U.S. dollar. Dealers in India cut their import orders as weaker Indian rupee made imports more expensive.

However, with Indian rupee appreciating against the U.S. dollar now, gold investors will be hoping for a normal monsoon season in India as farmers account for more than 50% of total gold purchase. Weak monsoon deters buying as it takes away disposable income.

Spot silver also gained 3 percent to settle at $28.3, after touching last Friday’s high of $27.91.

A Shanghai based dealer said to Reuters that he expects silver prices to gain as dimmed economic outlook increased the expectations of some monetary stimulus, weakening dollar and helping metals.

“Of course silver will be relatively weaker than gold due to its industrial nature, but we do sense anticipation of a further price rise in the physical market,” he added.

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Post Written By: Ed Liston Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications. He is widely quoted in various financial publications on the Internet. When Ed is not writing about stocks, investing in stocks, talking about stocks, or otherwise doing something stock related, he likes to go sailing and fishing in his yacht.