A softer U.S. dollar is helping push gold prices above $1,640 an ounce Tuesday, as investors took to the sidelines in advance of a two-day meeting of the Federal Open Market Committee. Meanwhile, the Akshaya Tritiya festival, which is considered an auspicious day to buy precious metals, is celebrated today in India, the world’s biggest bullion consumer.
The FOMC has kept analysts guessing as to whether policy makers will provide any hints of additional quantitative easing when they emerge from this week’s policy meeting. Minutes from last month’s Fed meeting showed support waning for more bond purchases; however, recent signs of a slowdown in the U.S. jobs combined with fresh concerns over the latest housing data could prompt policy-makers to reverse their earlier stance and lean towards a more favorable view of further stimulus. As a result, traders’ expectations are high for another round of quantitative easing, which is supporting gold prices at present.
"The confirmation of official central buying should help gold find some stability today, after a poor start to the week," UBS said in a note. "With positioning light, participants could certainly use this as an excuse to become a little friendlier towards the yellow metal.”
“But this sentiment is likely to be put on hold until the FOMC meeting is out of the way tomorrow," it added.
Fed policy has certainly been a large determinant of gold’s direction in recent years. Ultra-loose monetary policy has raised the prospect of inflation, and interest rates have kept the opportunity cost of holding gold low.
But Fed policy is only one of several factors that could pave the way for higher gold prices in 2012 and beyond. Central bank purchases, for example, are a significant price driver for the yellow metal, and all signs indicate that strong demand from that sector will continue in the coming year. With talk of a collapse in the euro and confidence waning in the value of all fiat currencies, it’s easy to understand why.
According to data from the London-based World Gold Council, Central banks bought 439.7 tons of gold last year, the most in almost five decades. Just last month, Mexico boosted its reserves by 16.8 tons to 122.6 tons, according to data from the IMF, and nations including Turkey, Russia and Kazakhstan increased their holdings as well.
Beyond gold, demand for silver is projected to grow as well. In India alone, silver demand is expected to exceed 6,000 tons annually by 2016-17 from the current level of 3,000 tons. According to the latest Minerals Exploration and Development Report demand may reach up to 10,000 tons by 2025.
Further stimulus from the Federal Reserve will certainly give metals prices a boost and soothe the concerns of the short-term and price focused investor. But in the end, the impact of Fed policy may well take a back seat to more stable and long-term fundamentals, which point to gold moving higher from here.
Gold Climbs Ahead of FOMC Meeting
Posted April 24, 2012
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