How long will international gold prices continue to ride the massive liquidity wave triggered by the ‘loose money’ policy of many central banks, especially the US Federal Reserve over the last four years? This is the big question engaging the attention of market participants. Indications are that it would take a few more months before the first roll-back of the easy money policy or tapering of quantitative easing begins.

Admittedly, gold prices have already fallen substantially to $1,300 levels from the highs of over $1,700 an ounce in September 2012. Following a steady decline from the beginning of this year, prices breached the $1,200 level briefly in April on strong expectation of Fed tapering that resulted in the mass exit of investors and less-committed gold bulls. Physically-backed exchange traded products witnessed strong outflows. That Fed tapering did not materialise as anticipated has provided a temporary cushion for the yellow metal to bounce back. Current prices are fundamentally not justified as physical demand growth has remained weak and investor interest has not been as robust as before.

Some of the drivers of gold prices are still in place, albeit less vigorous. For instance, the current macro-economic situation is somewhat supportive for the yellow metal. Global growth concerns may have faded, but have not disappeared. The dollar has weakened in recent weeks because of US shutdown and unresolved fiscal cliff. Different countries continue to follow monetary policies that are often seen as contrasting. The geopolitical front appears to be quiet at the moment; but some underlying and unstated unease lingers.

It is under these conditions that gold speculators – euphemistically called investors – have returned to the market and prices have found support. Because of US shutdown, data release from market regulator CFTC has been delayed. There is reason to believe a modest build in speculative positioning on the long side has occurred.

Moreover, a series of key US data releases are expected over the next two weeks, especially the October employment report. These keenly awaited reports will have some bearing on the market sentiment. Additional factors to be considered are China’s move towards tighter monetary policy and India’ s restrictions on gold including a hefty rate of 10 per cent customs duty and other procedural hassles.

Whatever be the market expectations, it is clear that the Fed’s monetary policy decisions will be data dependent; and from that perspective the latest US employment report is seen as soft. The unemployment rate declined marginally to 7.2 per cent. There still are questions about the pace of improvement in the US labour market and the sustainability of positive numbers in the months to come.

In sum, for gold, the macroeconomic environment at present appears to be somewhat supportive; but physical demand is not while investor interest is feeble. The yellow metal may have respite from an imminent collapse for some more time until tapering begins. The dollar will bounce back then. Tapering will also signal that economic growth in the US is back on track. As a result, equities are likely to rally, triggering a fresh wave of exodus from gold.

Unfortunately for Indian consumers, the benefit of a fall in gold price in dollar terms (likely below $1,250/oz) may not be fully available as the rupee risks weakening from its current levels when the dollar begins to gain strength in the months ahead into 2014.

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