Is the gold price based on ‘hope’?

The gold price (COMEX:GCG14) slipped further on 29th January morning, in anticipation of the FOMC’s statement later . It was also hit by the rise in Turkey’s key interest rate, this move raised hopes that the flight from emerging markets would now slow somewhat.
Today is the second day of the FOMC’s two-day meeting. Despite the weak December nonfarm payrolls report, commentators appear to believe that the Fed will announce further tapering, following the December taper of $10 billion, from $85 billion previously.
General consensus is that this will not have a dramatic impact on either gold or silver as both appeared to have priced in the possibility of tapering. Conversely, should Bernanke and his team surprise us with no tapering then this will have a positive impact on the price of gold and silver. The current FOMC meeting will also be Bernanke’s last as Fed Chairman. Last year we asked our readers and community members which central banker caused the most damage. An overwhelming majority voted for Bernanke.
If further tapering is not announced then there is likely to be a boost to the gold. Some reports suggest it may be difficult to maintain a higher gold price as China is on holiday for the Lunar New Year from a week on Friday. But I struggle to see the sense behind this thinking, the insatiable demand from the world’s largest market did little to raise the gold price last year, so why commentators believe next week will have a dramatic impact, I’m not sure.
Is the gold price based on ‘hope’?
An interesting and dismissive article has appeared on Reuters, stating that gold’s positive start to the year ‘seems to be based more on hope than any real change to the factors that saw the precious metal shed 28 percent last year.’
Russell believes that the only factors keeping gold up is the ‘hope’ that China will keep buying and India will ease the restrictions on the gold market. Both of which are, apparently, unlikely.
To address the India issue first, I can go part way to agree with Mr Russell on this. Who knows what the government will decide to do. They are motivated in part to maintain restrictions given the larger than expected fall in the current-account-deficit, so they may be keen to maintain restrictions. However, there is mounting political and public pressure for the controls to be eased, if not removed altogether. Significant numbers of those involved in the gold market have lost their jobs and criminal activity around gold smuggling appears to increase every week.
Mr Russell appears to miss the point, whilst officials may be working to limit gold investment, the public just will not have it. Gold demand may be muted, but those channels that facilitate gold supply into the country are only likely to get bigger and more efficient.
In regard to China, on the matter of how much they will buy this year, Mr Russell argues ‘At best, gold demand in China will hold up, but it’s unlikely that it will accelerate by much this year.’ And that’s all he says, no reason as to why it won’t increase. He makes this statement with zero reference to China’s consistently climbing gold demand, their moves to buy up gold mines abroad and the government’s efforts to facilitate gold investment for all investors.
Aside from the above, Mr Russell also misses the key factor that is currently driving the gold price: the growing disparity between the paper and physical markets. As market participants grow increasingly aware of the lack of physical underlying the paper market, further risk is calculated into the gold price. This is only going to increase, particularly as stories such as Germany’s issues with gold repatriation are only going to become increasingly common.
Source:Bullion Bulletin

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