Gold prices edge back on subdued demand

London (Sept 7)  Gold prices were slightly lower Monday as demand remained subdued following a mixed US labour report and as the US marked a national holiday.

The most actively traded contract, for December delivery, was down $US1.00, or 0.09 per cent, at $US1,120.40 a troy ounce on the Comex division of the New York Mercantile Exchange.

Analysts predict a quiet day of trading with the US on vacation for the Labour Day weekend, and follows two days of national holiday in China at the end of last week.

"I don't expect prices to move much," said Simona Gambarini, a commodities economist at Capital Economics. Prices had already fallen following the US nonfarm payrolls data, Ms Gambarini noted, which is used as a crucial clue to whether the Fed will raise interest rates next week.

Prices for the metal fell to two-week lows after the release of the August nonfarm payroll data, which indicated that US hiring slowed against expectations, with 173,000 new jobs that month. However, job gains for previous months were raised.

A move to raise the interest rate from historically low levels, set during the financial crisis, is expected to lower demand for gold, which is denominated in dollars. A rate rise would strengthen the dollar, making gold more expensive, and increase the returns on yield-bearing assets like US Treasury bonds. Gold doesn't pay dividends or yields, and struggles to compete with other investments when interest rates increase.

Until the meeting, gold prices are likely to be caught in a waiting game, analysts said.

"The uncertainty in this regard is likely to keep the gold price in check in the run-up to the meeting," Commerzbank said in a note.

However, long-term demand may be driven by retail demand from China and India, the world's largest gold buyers.

In India, where rural farmers drive a gold market that accounts for up to a quarter of the world's demand, lower prices typically lead to a pickup in buying. However, it may be weather, not the Fed, which will drive prices, Commerzbank said.

"Gold prices in India have been trading at a discount on the world market price for the first time since mid-July, which suggests weak physical demand there," noted Commerzbank. "This is probably due to the poor monsoon season which has reduced the income of the rural population."

Source: Business-Spectator