Rising U.S. Dollar Takes Shine Off Gold in Asia

Hong Kong (Sept 14)   A rallying U.S. dollar is fueling expectations in Asia that gold prices, already at their lowest in more than seven months, have further to fall, offsetting the expected rise in demand from year-end festivities in China and Indian weddings.

Gold and the dollar typically move in opposite directions, as rises in the currency prompt investors to shift into higher-yielding assets. By contrast, a falling U.S. dollar or rising geopolitical tensions usually sends investors to the safety of the precious metal.

In recent weeks, both factors have moved against gold, with the dollar rising sharply and investors discounting the likelihood that political tensions in the Middle East and Ukraine will escalate.

Any sharp fall in prices usually brings out bargain hunters betting gold will soon resume its rise. This time, though, investors in China and India, which together account for more than 70% of the global demand for gold, are being cautious. There are concerns the Federal Reserve is moving closer to raising interest rates—a potential boon for the dollar, as it boosts the allure of treasurys.

"The very strong dollar is getting stronger and stock markets are performing very well," said Wallace Ng, head of precious metals trading at Gerald Metals in Shanghai. "Gold does not look very attractive. We don't see any investment demand for gold and silver in China."

He said investors in China, the world's largest gold consumer, were invested equally in gold and stocks last year, but a bearish outlook on gold is prompting them to shift more to equities and other investments.

Others, too, say the gold market in Asia is being buffeted by the surge of the U.S. dollar.

"The whole financial market is being based on hypothesis of a strong dollar and the pickup in the U.S. equity," said Albert Cheng, managing director for the Far East at the World Gold Council. It's the "single most important factor in the world," he said.

Mr. Cheng said buying in Asia would pick up, although he predicted it would still be less than last year, with China's demand expected to be up to a 1,000 metric tons this year, compared with more than 1,100 metric tons last year.

China's demand for gold isn't expected to rise until early next year, ahead of Lunar New Year festivities.

Spot prices for gold are currently hovering around $1,234 an ounce and traders in Asia say prices could fall more than 4%, to as low as $1,180 an ounce, in coming weeks.

China's demand is also being hampered by plentiful stocks of the commodity, built up from last year when buyers scooped up the metal as prices plummeted, say traders and analysts.

"That is making demand less sensitive to prices," says Victor Thianpiriya, precious metals analyst at  ANZ Banking Group.  ANZ.AU -0.94%    

He estimated about 800 metric tons of gold stocks have been built up in China over the past 18 months—considered high compared with its quarterly consumption of about 200 tons.

Demand for gold in India, the world's second-largest consumer, has picked up in the past two weeks, but the country is now entering a cultural period—lasting to Sept. 25—that is deemed inauspicious to buy.

However, India's demand is expected to peak in the third week of October during the Hindu festival of lights, which is considered the most favorable buying period.

"The main festival season is round the corner and demand will definitely increase if prices rule at or below the current level," said Ashish Mundhra, director with Chennai-based gold distributor Mundhra Bullion Pvt. Ltd.

He said buyers are expecting local gold prices to decline to about 25,000 rupees ($410.25) for 10 grams from the current level of about 27,500 rupees.

"People are bearish on gold currently," said Haresh Acharya, director of Parker Bullion Pvt. Ltd., adding that he was expecting a premium on gold in the local market to rise by the end of September.

Howie Lee, a Singapore-based investment analyst, said demand is expected to rise sharply about that time as, by then, the Federal Reserve's decision on interest rates is expected to be clear and its impact on gold prices would have fully played out.

Source: WSJ