No Pedal to the Metal! Gold to gain steam! Inflation in India and in neighboring China, estimated to be at a 30-month high, will help gold to jump ahead once again! Traders insist that the stage is set for a conducive environment that will push bullion prices higher. Some analysts forecast that gold will be subject to a tug-of-war between profit-minded sellers and bargain-hunters who will buy the metal on dips, a combination that promises to trigger volatility.“The bullishness that has been shown by China in buying and hoarding gold will have a big effect on the global gold market,” said Dhaneshwar Jadhav, a bullion retailer in Mumbai. He went on to add that inflation in China in November 2010 had jumped to a two-year high of 5.1%, dragging year-on-year growth up to 9.6%.
“There is news that China’s wheat crop is under threat from below average rainfall,” said Chandrasekhar Bhatt, bullion analyst at a broking firm here.
“Wheat flour prices are ruling 16% higher than a year ago, driven by fears of drought. Though the Chinese government has announced a $1.96 billion relief package, food prices are bound to touch record levels. And that will set the stage for an upward revision in the price of gold,” he added.
For some time now gold prices have been on a roller coaster, buoyed by the turmoil in Egypt. According to some experts, the high – 18.5% – rate of inflation in Egypt has been termed a major factor in the uprising that dislodged Hosni Mubarak. Moreover, if China reports a high inflation number as is expected, the spike in gold will follow, insist traders.
Trying to combat inflation in the best way possible, China raised its lending and deposit rates by 25 basis points each around the Chinese New Year. This is a second increase in just over a month. The move was meant to tame inflation.
Most analysts are expecting at least one more rate hike, closer to the second quarter of the year. The move has raised concerns in the market that a slowdown in China’s economy could have a ripple effect. Soon enough and a heartbeat after the rate hike was announced in China, oil prices slumped. Analysts say it is a pointer and could cool China’s economy.
Inflation in India
With India too battling with high levels of inflation, many traders have forecast that all of this has profound implications on the price of gold. Gold will soon gain steam in the international markets, as a higher-than-expected inflation readings expected from China will prompt a rush into the metal,” said a bullion analyst at an international broking house here.
In a note to his clients, Paulo Gracias of Reliable Gold Securities said that fears of inflation had driven demand for gold as a retail investment in China, with the country reportedly importing over 200 tonne over the last three months.
As inflation continues to increase, the buying of physical gold by the Chinese will send the price of gold skyrocketing, he said, advising customers to stay invested. Moreover, with India looking to raise key interest rates after its December inflation reading jumped to 8.43% versus a year ago, traders insist gold is being used as a store of value by consumers in India to protect against rising inflation. Official data showed that food prices surged 18.3% in the week ended December 25, the highest rate since July, as onion prices soared 80%.
“Strong industrial growth in urban India and expansion in the rural market is literally putting cash into farmers’ hands. Though better harvests will ease inflation in the coming months, there is concern that tightening by the central bank in India, the Reserve Bank of India is a signal that India will join China in moves to dampen growth rates. Both the economies are worried about overheating,” said a precious metals analyst at DBS Bank.
Traders also point to record imports of gold, which they maintain is another case in point. India is said to have imported around 800 metric tonnes from 557 tonnes in 2009, and exceeded the previous all-time high of 769 tonnes in 2007, according to Ajay Mitra of the World Gold Council. He reportedly said that price was no longer a factor – “Our assessment is that demand will continue to be strong”, for investment demand for gold in India grew faster than the 62% gain in jewelry demand in the same period.
Mitra noted that it has been demand driven with investment in mind. “Though a lot of consumers in India buy gold in the form of jewellery, the core proposition really is security for the future, which is the investment angle for buying into gold,” Mitra added.
Moreover, with the country going in for its annual budget at the end of February, the government has already set the ball rolling. On Friday, the government liberalized norms for the import of precious metals – gold, silver, platinum and palladium – by select nominated agencies.
Inflation is coming our way, make no mistake about it
Inflation has soaked up the dollar’s purchasing power, forcing millions of Americans to slash discretionary spending. Furthermore, the U.S. Federal Reserve, through its lax monetary policy, has been exporting inflation to the rest of world. The resultant price increases in commodities have hit the wallets – not to mention the bellies – of many consumers, including those in the United States. A particular note about the U.S.–related factors: they will become more influential as the year progresses. The U.S. faces an extensive political debate about debt reduction this year that begins in earnest with President’s Obama’s rollout of his fiscal year 2012 budget request to Congress this week. All agree that government spending must be trimmed, but negotiating real reductions will be challenging. If the U.S. can’t meaningfully cut the federal budget, the failure will become more apparent in the third quarter, as politicians scramble to make a deal before the federal government’s fiscal year begins on October 1, just when the Indian wedding season demand for gold is ramping up. In regards to the 2012 budget Ron Fricke president of Regal Assets stated “The US administration submitted their budget for 2011 and with $3.7 trillion in mind it is up $1.54 trillion from 2010 clearly showing the flailing economy and no sign for recovery”
Unless the U.S. experiences a recovery so strong that increased government tax revenue will ease deficit concerns or U.S. political leaders make a genuine deficit-reduction breakthrough, there is a logical thesis for gold and gold-related assets to appreciate in the second half of 2011 that is compounded by seasonal Indian factors.
Source: http://goldcoinblogger.com
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