Gold to stay volatile as markets remain jittery
by Geoff Candy
Speculation around the health of the US economy is behind much of the recent weakness in gold prices but, according to Joe Mazumdar of Haywood Securities, there are also a number of other factors at play.
Mazumdar says that although the fundamentals remain sound, central banks are still buying gold, inflation within emerging markets continues to ebb and flow and, while volatility has made it harder to justify, the metal retains its safe haven appeal, the metal does have a few short term issues.
One of these is a lack of support from the physical market.
"The problem with gold right now is that the price of gold in India in rupees has been up substantially towards the latter part of 2011 and continues to be, making it difficult for the Indian consumer to support gold at these sort of prices," he explains.
Adding, "when you add in the issues with the tariffs where there is less gold available to them, and probably at a premium, support levels on the jewellery side by physical demand from India is right now, weak."
Importantly, Mazumdar doesn't believe that the Indian sentiment to gold has changed but cautions, "the issue right now is, with the growth in the economy in India, have people's wealth got to the point where they can afford the current prices of gold once you take the tariff away? In terms of the festival coming up, yes I believe that the support level for gold will come up, but on a relative basis it might not be as strong as it would have been without the tariffs or without the weakness in the Indian rupee."
While Indian support might be weaker now, than in previous months, Mazumdar says, the speculative market could well provide some support.
"Speculative positions [on the COMEX] peaked around August... Right now there is a lot of room in the Comex spec position for it to go up - let's say if Bernanke comes back and starts talking about quantitative easing again, there's a lot of room in that spec position to take gold up."
But, he points out there are also a number of short positions being taken up as well, "a lot of that short covering will create jumps and spikes in gold going forward, and also probably add to the volatility in the long term."
"The underlying fundamentals why you should own gold are the same, but right now a lot of the speculation is around quantitative easing in the US and what's happening with the euro, and that's made markets jittery and jumpy for a lot of things and not just gold."