Gold Price Settling Lower after Post-Fed Decision Surge
Posted by Brian Ford on October 01, 2015
Gold has been on the upswing since hitting a September low in the days leading up to the U.S. Federal Reserve meeting. After the Fed opted to delay an interest rate hike until later this year — or perhaps even 2016 — the price surged, jumping from $1,105 on September 15 to more than $1,153 nine days later.
The price has settled back down since the initial leap, however, and took a huge hit on the final day of trading in September. Analysts credit the downturn to the release of a stronger-than-expected U.S. jobs report that has some investors reconsider how long the rate hike delay will last.
Adrian Ash, head of research at BullionVault, offered some well-measured perspective on why the bad news of the past two weeks could be meaningful or could be insignificant to long-term prices. “Maybe it’s the end of the world. Or nothing to worry about,” said Ash in a note to MarketWatch. “If that feels oddly like mid-2008 to you, when gold slid 25% in four months, even as the collapse of Lehman Brothers drew near to mark the sharpest plunge in global trade since the 1930s, you aren’t alone.”
For those expecting a recovery like we saw in 2008, there is good news from China and India, whose growing demand doesn’t seem to be reflected in recent price trends. According to the Wall Street Journal, China bought 217 tons of the precious metal in the second quarter while China’s year-long total has reached nearly 1,900 tons — up from just 561 tons from the same time in 2014.
Furthermore, there are calls for China’s central bank to increase its gold holdings, something it may be complying with. Currently, according to Bloomberg, the nation holds only 1.6% of its foreign reserves in gold while the United States sits at 73%, and Germany, France, and Italy are all around 65%. But it did increase its holdings in August, and the publication noted that this same trend is also occurring in Russia and Kazakhstan.
“China’s accumulation of physical gold is likely to continue,” Jordan Eliseo, chief economist at Australian Bullion Co., told Bloomberg. “At present, they have an extremely low allocation to gold as a percentage of forex reserves, especially compared to many developed market nations.”
Demand is also rising in Asia’s other colossal market. India. The world’s second largest gold market, gobbled up 155 tons in the second quarter, according to Mining.com. And the nation’s August demand was even more promising in the lead up to festival season on the subcontinent, with Indians splurging to buy 140 tons in August compared to just 89 tons in July.
When physical demand is this strong but the price remains low, something is fishy. The uncertainty of the Fed is the prime candidate in holding down prices, leaving markets confused and gold bugs holding an asset that is likely to keep moving — one way of the other — until the decision on a rate-increase date announced.
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