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Tuesday, August 11, 2009

Gold fails to pass the acid test of $950

Some nervousness in the commodity ahead of FOMC meet

Gold failed to break pass the strong barrier posed by the $950 levels and eased a bit in London today as dollar firmed up ahead of the FOMC meet and profit selling remained the dominant theme for the global markets. There is a possibility of some further panic selling in the today's session now in case dollar maintains its recent gains.

Meanwhile, last week, 16 Eurozone central banks rolled over the Central Bank Gold Agreement CBGA2 into a CBGA3. Under the new agreement announced on Friday, signatories won't be allowed to sell more than 400 tonnes of gold. This restriction is 100 tonnes a year less than the 500 tonnes a year under CBGA2. In total, the sales will not exceed 2,000 tonnes in five years.

The agreement is positive for gold as it eliminated the risk that central banks in Europe will dispose gold in an uncontrolled manner. Indeed, this risk has diminished greatly in recent years. Statistics showed that gold sales by central banks has dropped -73% yoy in 1H09.Moreover, SNB stated that it 'has no plans for any further gold sales in the foreseeable future. With gold holdings amounting to 1,040 metric tons, it holds a substantial part of its currency reserves in the form of gold'. As of June 2009, Switzerland is the 7th largest gold holders in the world while the US remained in the first rank.

Dollar is trading stronger around 1.4100 levels against the Euro ahead of the US FOMC meet. The US currency has been holding onto its gains post a surprisingly strong U.S. non-farm data last week. The policy-setting Federal Open Market Committee (FOMC) will meet on Tuesday and Wednesday, and central bankers are expected to hold the overnight fed funds rate in a range between zero and 0.25 percent.

COMEX Gold futures for December are trading at $948.80, up $1.80 from the previous close but off the day's highs of $951 per ounce. MCX October futures are trading at Rs 14791, up Rs 50 or 0.34% from the previous close. The open interest is down 2.40% so far in the day and some more pressure can emerge as the critical Rs 14800 barrier appears on the horizon.
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