Gold: Sideways Trading Likely in Near Term

July 25, 2012 at 09:42

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Gold rose in Asia Wednesday, as some safe-haven buying underpinned prices amid a broad selloff in regional equity markets, though traders expect it to trade sideways over the next few days as some investors move to the sidelines given uncertainty surrounding developments in Europe.

It is too early to say whether safe-haven will continue, as the European and U.S. sessions could see some modest selloffs, market participants said.

“Investors are looking at the Spanish event and how the European debt crisis evolves,” Wing Fung Group analyst Mark To said, adding that the European problem is unlikely to trigger a selloff in gold.

The European debt crisis deepened after Moody’s Investors Service lowered its ratings outlook to negative from stable for Germany, the Netherlands and Luxembourg–all of which are triple-A-rated sovereigns. Moody’s cited an increased likelihood that the region’s highly rated members will have to bear the burden of bailing out Spain and Italy, fanning fears that a bailout would overstretch the region’s finances.

Some investors could be buying gold as a hedge against inflation risk associated with potential further central bank stimulus after The Wall Street Journal reported Tuesday that U.S. Federal Reserve officials are moving closer to taking new steps to spur economic growth.

“Investors are still hoping for another round of quantitative easing,” a Hong Kong-based trader said. The Fed’s rate-setting committee is scheduled to meet next week.

In the medium to long term, gold could move lower if the possibility of further monetary stimulus in the U.S. fades, Wing Fung’s Mr. To said.

Analysts at ANZ said gold could trade toward the lower end of the $1,550-$1,600/oz band, but Indian demand, which has been absent for much of this year, could start to support prices within the next six-eight weeks.

Some analysts said high inflation in emerging economies, including China and India, could trigger demand for gold, despite reduced Indian consumer demand for the precious metal, which is near record levels in rupee terms, and which could be further depressed if drought-like conditions persist until the summer harvest