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Analysts remain cautious over price outlook of gold despite recent plunge

By Tan Shih Ming (Xinhua)

18:29, July 03, 2013

SINGAPORE, July 3 (Xinhua) -- As gold market went through a period of great volatility since late last year, analysts forecast the spot gold price will remain on the downward trend in medium term although some said rebound may take place in the short term.

Since hitting a high of 1,798 U.S. dollars an ounce last October, gold price had fallen about 35 percent to 1,202 U.S. dollars as at end June, with nearly 25 percent plunge taking place in second quarter alone. Signs of economic recovery in the United States, Cyprus central bank gold sale plans, U.S. Federal Reserve Chairman Ben Bernanke's signal in late May that the Fed may start tapering monetary stimulus program if the economy continues to improve at the current rate, and investors' cut-loss selling were cited as main reasons for the gold price rout.

HSBC Global Research has cut its gold price forecast for the rest of the year to a 1,125 U.S. dollars and 1,375 U.S. dollars per ounce trading range. The research house said the discussion by the Federal Reserve of a tapering, or reduction, of its quantitative easing asset purchases was more aggressive than initially envisaged, is negative for gold.

Furthermore, turmoil in emerging markets and the prospects of lower growth in China have weighed on bullion, as a slowdown in China's gross domestic product growth may reduce consumer appetite for physical gold in that country.

Finally, there is lackluster demand for gold, as price- sensitive buyers may wait for a well-defined bottom before entering the market. Moreover, increased import duties and the Indian government's efforts to reduce gold imports are curbing that nations' demand for bullion and gold jewelry.

CIMB Research also said gold is no longer considered a safe haven. As physical buying cooled, fund outflows continue unabated for gold market. As at end June, SPDR Gold Trust, the world's largest gold-backed exchange-traded fund accounting for more than half of global market share, lost about 381.33 tons or 28.2 percent of its gold holdings in this quarter alone. To put this in perspective, the figure is 122 percent of India's total bar and coin investment demand in FY2012, and India was being the largest consumer of gold bars and coins.

CIMB saw no significant increase in inflation as a result of the huge increase in liquidity around the world. In a world of likely higher interest rates following Federal Reserve's tapering plan, a non-yielding asset such as gold is always likely to struggle. Hence, it is unlikely that gold will see the levels of investor demand it has experienced over the past couple of years.

Phillip Futures Investment Analysis said gold investors will focus on Ben Bernanke's possible actions in the upcoming July and September Federal Open Market Committee meetings, believing that both meetings will be most important events determining gold prices.

If there is an exact and detailed stimulus reduction schedule to be announced in the late July meeting, the research house set the price target of gold at 1,107 U.S. dollars; If there is no major changes during the July meeting, but instead, an exact and detailed stimulus reduction schedule announced only in the September meeting, the house forecast price to rise to about 1,346 U.S. dollars before dropping to 1,200 U.S. dollars, a key support level widely believed to be the product cost price floor. As for scenario that there is no major change to be announced during both the July and September meetings, Phillip Futures said gold may rise to 1,400 points, the level that gold prices hovered around before investors started pricing in Ben Bernanke's tapering plans.

Indeed, Standard Chartered Research is predicting gold prices should reach a floor very soon. It said given the sharp price fall, gold producers in places such as Australia are under severe pressure to cut output. If significant supply cuts materialize they are likely to help underpin prices.

In addition, central banks have continued to buy gold. The most recent International Monetary Fund data showed that Kazakhstan, Russia and Turkey added 28 tons of gold to their reserves in May, ignoring recent price volatility and price performance.

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