LONDON (Commodity Online): Gold and silver prices seem to be waiting for the New Year to dawn before starting a renewed bull run. With festival season and holidays coupled with a heavy snow in Europe impacting several businesses, gold and silver prices also showed signs of a dip this week. However, analysts said the prices are bound to shoot up in the New year.
In India gold fell by Rs 40 to Rs20,720 per 10 gm in continuation to a combined loss of Rs60 in last two sessions, while silver fell by Rs130 to Rs44,820 per kg, after a decline of Rs350 in the last two days.
Gold for February delivery settled $1.40 lower to $1,387.40 an ounce at the Comex division of the New York Mercantile Exchange. The gold price traded as high as $1,391.70 and as low as $1,385.60 during Wednesday’s session.
Gold prices got some support from news that the International Monetary Fund has completed the sale of 403 tons of gold originally announced in September 2009. Many analysts had been worried that a large gold sale would lead to an oversupply in the market and lower prices.
China has said that it will not be buying additional gold for its reserves, but is encouraging its citizens to buy and is opening up the gold trading market to spur demand. China, however, is unlikely to announce if it is buying gold for risk of triggering a rally in the price.
Central banks, in general, regard reserve allocation as an ongoing government policy. Although the governments consider fundamentals like dollar weakness and the sustainability of gold as money, they don’t trade gold, they buy it as an investment.
In the third quarter, purchases by central banks outweighed sales by 21.9 tons according to the World Gold Council. Eurozone banks held on to their gold while Russia bought 46.2 tons, Philippines bought 4.2 tons, Thailand added 15.6 tons to its reserves and Sri Lanka increased its holdings by 6.9 tons.
Inflation headlines should also help support gold prices. The Reserve Bank of India said inflation is not slowing as quickly as it wants. Gold becomes appealing during times of inflation as a hard asset that retains more monetary value as fiat currencies are devalued. This thesis hasn’t really panned out for investors in the United States as the inflation rates stay very low, but emerging market countries like China and India are seeing consistent high inflation.
More inflation is good for gold, but raising key interest rates, the way to combat inflation is bad for the metal. As the cost of borrowing increases and paper currencies get stronger, gold becomes less appealing. But so far rates have not been hiked high enough to damage gold prices, or in China’s case, not at all.
Most analysts are looking towards 2011 to provide real direction for the gold price. Historically January and February are good months for gold as investors buy back positions they shed ahead of the new year.
