“D-word” hurts gold prices, explains trader Sharps Pixley

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The struggle to break out beyond the $1,800 level recently is best explained by renewed fears of deflation rather than inflation taking hold in Europe, explains precious metals trader Sharps Pixley

After falling for the past two weeks, the U.S. Comex gold futures rebounded 0.67% to $1,713 on Thursday after touching a low of $1,698.70 on Wednesday.
Gold traders seem frustrated after the gold futures failed to pierce through $1,800 in early October. Also the market appears to be concerned with the “D” word – deflation.

The ECB president Draghi said that his bond-buying programme will focus on countries whose fiscal paths are sustainable and the programme will not create inflation. He was more worried about falling prices in several euro-area countries than inflation.

In Europe, the October eurozone manufacturing PMI was at 45.3 compared to the expected 46.5. The IMF projects that the euro area may contract 0.4% this year. In the US business spending prospect looks grim – non-defense capital goods bookings were unchanged in September compared to a 0.2% rise in August. Slowdown in Europe and Asia and the looming fiscal cliff in the US have hurt business orders.

The Fed would continue with the same QE3 policy announced in September which calmed the gold market yesterday. Also the same low Fed Funds rate would be maintained at least through mid-2015. The bigger event for gold would be the 6 November US election. If Romney wins, the dollar could get a boost and the Fed’s easing policy might not continue.

Today, more central bank gold buying news cheered gold. Brazil added 1.7 tons in September while Turkey added 6.8 tons. Brazil last added gold in December 2008. The buying is expected to continue given the lower prices and currency risks in the developed world. The Bloomberg data shows gold-backed ETP holdings reached a record high of 2,585.1 metric tons as of 24 October while big speculators are still bullish on gold.

The important events to watch would be the US Q3 GDP data on 26 October, the Bank of Japan Monetary Policy Meeting and the Eurozone October business climate indicator on 30 October, the US October ISM manufacturing index and China’s official October PMI on 1 November and the US non-farm payrolls report on 2 November.

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