Gold Market: Physical Sales And ETP Outflows Explode, FOMC Looms

Markets remained relatively quiet Tuesday, as most traders and investors waited on the sidelines for rate announcements from both the Federal Open Market Committee and European Central Bank later in the week; however, most analysts agree that the FOMC meeting could have the greatest impact on Gold prices.

Fed and ECB Policy statements may trigger a Roller-Coaster ride for Gold and Silver:
The U.S. Fed will also be the first to make its interest rate announcement today, and statements could have a major impact on the U.S. dollar which in turn will affect Gold Prices. There is a perception that the U.S. is susceptible to falling back into a recession and I think that will make the Fed more accommodative. Gold markets could see a big push in prices above technical resistance levels if the Fed hints that they could extend the QE program. The ECB will release its interest rates decision on Thursday. That can have an adverse effect on Gold Prices as lower EU rates may have a serious implication for the value of the euro. This may create more demand for the U.S. dollar, which ‘historically’ is negative for the entire commodity complex, and more pronounced for Gold and Silver.

Gold ETP Outflows at Record High:
Gold Holdings in exchange-traded products plunged 174 metric tons in April, the biggest drop ever, as prices entered a bear market and wiped $17.9 billion from the value of the funds. Holdings in the ETPs slumped 7.1% in April to 2,275.84 tons, the lowest since October 2011, Bloomberg data shows. The value of the assets dropped to $108.1 billion. Investors pulled $10.23 billion from gold funds in the first quarter, the most since at least 2000. SPDR Gold Trust holdings, the biggest gold-backed ETP, dropped to 1,078.54 tons, the lowest since September 2009. About half the holders of the SPDR Gold Trust, are institutional investors and institutions may continue to sell as they switch into equities. Holdings in ETPs backed by silver slumped 1.4% in April to 19,405.34 tons. Assets in funds backed by palladium and platinum also declined. Hedge funds and other money managers have accumulated their second-biggest bet against gold on record, holding 69,726 so- called short contracts as of April 23, government data shows. The decline in ETP holdings remains the “key downside risk” for prices in the near term.

While Gold Prices have rebounded 12% since touching a two-year low on April 16, they fell 7.7% last month, the biggest loss since December 2011, as the stock market rallied and consumer costs remained stable. Gold investors shifted focus to Stock Markets as equities were winning while there were no signs of inflation, which needs to be hedged by Gold Investment.

Physical Gold Demand Explodes to Record High:
Sales of American Eagle Gold Coins by the U.S. Mint rose to the highest since December 2009 after Gold Prices in April fell the most in 16 months. April sales totaled 209,500 ounces, up from 62,000 ounces in March, data on the mint’s website show. The amount for December 2009 was 231,500 ounces. Sales of American Eagle Silver Coins rose to 4.2 million ounces from 3.36 million in March. The U.S. mint said April 23 it suspended sales of coins weighing a 10th of an ounce after demand more than doubled from a year earlier. Perth Mint, which refines almost all of the nation’s bullion, said that demand jumped to the highest in five years after prices plunged, with the factory kept open through the weekend to meet orders. The amount of Gold transferred between accounts of London Bullion Market Association (LBMA) members rose by 5.2% month-on-month in March to an average of 21.8 million per day, the organization said Tuesday. The amount of Silver transferred climbed by 8.6% to 132.5 million ounces daily.

Long-term Investors Accumulating Gold Globally:
While Inflation has not shown any major signs of rising (Only as per Govt. provided data and not as per market logic), all the other reasons why people were piling into gold have not changed in the least manner. The Fed’s preferred measure of core inflation, which excludes more volatile food and energy costs, rose just 1.1% in the year to March. Overall inflation was up just 1%, the smallest gain in 3-1/2 years. The Fed targets inflation of 2%. The reasons have all the more increased with the Cyprus bank deposit confiscation issue that rattled the world and the peoples trust in their banks in time of distress.

Demand for Gold Coins also surged at mints from Australia to the U.K. while demand for Gold Jewelry and Gold Bars shot up to a heightened frenzy in the Gold markets of India and China. In Australia, buyers were waiting in lines half a kilometer (0.3 mile) long to get minted coins, and jewelry shops in India and China ran out of Gold in a single day, Jason Toussaint, the managing director of investments at the London-based World Gold Council, said in an interview. India and China are the world’s largest consumers of bullion. Surging demand from Dubai to Istanbul has pushed physical premiums in the region to levels not seen in years as the biggest price slump in three decades lures consumers, according to MKS (Switzerland) SA. Trading for the benchmark contract on the Shanghai Gold Exchange surged to a record last week, while premiums to secure supplies in India jumped to five times the level before the slump. China and India account for 50% of the world’s gold demand.

A string of poor U.S. economic data, which now totals eight out nine key indicators and includes a substantial miss on the Q1-2013 U.S. GDP, has many market participants believing that the market momentum that drove capital out of the Gold market may be reversing. After the recent data we’ve seen, nobody expects the Fed to stop QE at this point or also any time soon. Gold and Silver Markets are pricing in a more distant end of the QE (quantitative-easing) program, as they believe the Fed will maintain its aggressive bond purchase to bolster the U.S. economy, which has driven down the opportunity cost of holding zero-yielding assets like gold relative to Treasury yields.

Federal Reserve will not end Quantitative Easing in the near term:
The US Federal Reserve, which is buying $85 billion of bonds a month in a third round of Quantitative Easing, concludes a two-day FOMC policy meeting today. The Federal Reserve’s debate over U.S. monetary policy could begin to shift away from the prospect of reducing stimulus toward a discussion about doing more, given the signs of economic weakness and slowing inflation. the Fed is widely expected to maintain its Bond Buying program to support an economic recovery that is still too weak for the job market to truly heal. With the central bank’s favored inflation gauge slipping and employment growth faltering, Fed officials could again find themselves in the uncomfortable position of having to shift from talk of curbing stimulus to the possibility of doing more. At present, the unemployment threshold stands at 6.5%, provided inflation does not threaten to breach 2.5%. Currently, analysts see the Fed buying a total $1 trillion in Treasury and mortgage-backed securities during the ongoing third round of quantitative easing, known as QE3. Until recently, analysts had believed the Fed would start taking the foot off the accelerator in the second half of the year. Research suggests such “forward guidance” about the future path of interest rates can have a strong impact on current borrowing costs, and one Fed official — Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank — has already suggested lowering the threshold to give the economy a boost, reported Reuters.

Now, things are looking a bit shakier which should add to the Gold Bulls delight. The industrial sector is not quite as perky. Durable goods orders posted their largest drop in seven months in March, while an index of Midwest manufacturing showed an unexpected contraction in the sector for April. Despite the economy’s softer tone, a wait-and-see attitude seems the most likely approach for now. The Fed is expected to nod to the economy’s disappointing performance when it announces its decision today, even as it maintains its course. But if the economy’s fortunes do not improve, the US Federal Reserve may well look for fresh ways to boost its support to the economy — increasing the amount of assets it is buying is just one option. The Fed could announce intent to hold the bonds it has bought until maturity instead of selling them when the time comes to tighten monetary policy. Fed Chairman Ben Bernanke has already raised this as a possibility.

“What’s more relevant than the current inflation trend is what this means for forecast inflation,” Wolfers said. “And I think even more relevant than the Fed’s official point estimate for inflation is the probability that deflation looms as a real threat. Inflation rates lower than 1 percent certainly raise a greater risk of deflation.”

Declines in Commodities widen in April:
The Standard and Poor’s GSCI gauge of 24 commodities dropped 0.8% to 624.66 by 4:50 p.m. in London, heading for a monthly decline of 4.6%. That would be the biggest monthly drop since May. The UBS Bloomberg CMCI index of 26 raw materials was down 0.5% at 1,481.091. Copper fell in New York, set for the biggest monthly decline since October, on signs demand has yet to revive as stockpiles of the metal increase. Prices are down 6.2% this April. Copper in London dropped 1.5%, zinc was down 2.4% and aluminum slipped 1.8%. Corn fell from a four-week high on increased sales by U.S. farmers and on speculation that drier weather in the next five days may accelerate delayed Midwest planting. Soybeans dropped while wheat rose. Natural gas futures dropped in New York on forecasts for milder weather that would cut demand for the heating and power- plant fuel.

West Texas Intermediate – WTI Crude Oil fell for a second day after OPEC’s production increased to a five-month high and an industry group said U.S. stockpiles climbed for the first time in three weeks. While total U.S. crude stockpiles rose last week, supplies at Cushing, Oklahoma, the delivery point for New York-traded futures, decreased by 1.4 million barrels, the API data showed. The Energy Information Administration report today may show they declined by 900,000 barrels. Futures slid as much as 0.6% in New York after dropping 1.1% yesterday. U.S. crude inventories rose by 5.2 million barrels last week. Government figures today are projected to show a gain of 1.1 million barrels. Daily output by the Organization of Petroleum Exporting Countries (OPEC) increased in April by 194,000 barrels a day, a separate survey indicated.

Rupee Gain will keep Gold Prices in check in India:
The Indian Rupee – INR, has strengthened, with the dollar back below the 54-rupee level after news that India will cut the tax on interest payments for foreign institutional investors to 5% from 20% for investment in government and rupee-denominated corporate debt. This is yet another sign that authorities are committed to preventing further INR depreciation and supporting inbound investment – especially given 25 bp (basis points) of easing expected on Friday by the RBI. On that note, a cut to reserve requirements or an increase in repo operations is also possible. Recent reports suggest liquidity may be too tight in the banking system and the transmission mechanism is not working well enough. Another positive news is that the finance bill has finally passed Lok Sabha (lower house), hence finalizing the budget. Moves in the rupee can affect gold demand from India, the world’s largest consumer, since a stronger rupee would make Gold Bullion cheaper for Indians in their own currency.

Gold Market traders and investors need to think long term. Physical Gold is a long-term market. Don’t be unnerved by short-term gyrations. Have a plan; understand your goals and your portfolio allocation.