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Demand in India Strong As Uncertainty Helps Gold

Release Date: 
Tuesday, August 30, 2011

The price of gold rose on Monday ahead of the Fed releasing minutes from its August policy meeting. The central bank's members are split over what steps to take to bolster growth. However, markets reacted positively to the Fed's decision to extend its annual meeting to two days.

"For now, the Fed has managed to buy itself some time to gather more data and mull over what to do next. This is positive for gold, in our view," wrote UBS strategist Edel Tully in a note. "The market is likely to be volatile over the next few weeks, until there is clearer guidance from the Fed, which will likely come after the two-day FOMC meeting in September. That the scheduled meeting has been extended for an extra day suggests that deliberations on potential policy actions will be comprehensive."

"You'd have to say 'buy the dips' because with all the uncertainty all still very present and far from being resolved, despite better data, you still want gold as an insurance," said Credit Agricole analyst Robin Bhar.

The physical market for gold saw demand from jewelers as prices remained below all-time highs, while Indian consumers are expected to step up purchases before the upcoming religious festival and wedding season begins in September. Gold demand in India, the biggest consumer of gold, may surge 25 percent during the festival season this year as buyers expect prices to extend a record rally on safe haven demand, according to Rajesh Exports Ltd., India's largest jewelry maker. Purchases of gold jewelry, coins, bars and medallions may climb to 250 metric tons in the three months ending Nov. 30, compared with an estimated 200 tons in the same period a year earlier, said Rajesh Mehta, chairman of Rajesh Exports.

Imports may reach a record 1,000 tons this year as investors seek a haven against inflation and volatility in stock markets, Prithviraj Kothari, president of the Bombay Bullion Association, said.

"We have seen quite good demand," Mehta said. "When people are buying jewelry, their motive is investment."

Indian consumption rose to a record 963.1 tons last year, according to the World Gold Council.  Purchases surged 60 percent in the three months ended June 30, from a year earlier, the council said.  Investment demand jumped 78 percent, the second-highest quarter on record. "Demand will go up because of the festival season and also people feel that prices may go higher," Mehta said. UBS AG's physical gold sales to India on Aug. 22 were the most since May 10 and more than double the daily average volumes this year, the bank said in a report on Aug. 23.

(Sources:  "Gold Climbs Above 2 Percent, Nears $1,830 an Ounce," CNBC, August 30, 2011; "Gold Sales in India May Increase 25% During Festival Season, Jeweler Says," Bloomberg, August 30, 2011)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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