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Gold: Gold Margins To Be Lowered, FOMC Rate Decision May Curb Demands

Gold: Gold Margins To Be Lowered, FOMC Rate Decision May Curb Demands

2011-06-17 21:53:00
David Song, Currency Strategist


Gold/USD NY Spot Close 1539.11

XAUUSD_Gold_Margins_To_Be_Lowered_FOMC_Rate_Decision_May_Curb_Demands_body_xauusd_risk.png, Gold: Gold Margins To Be Lowered, FOMC Rate Decision May Curb Demands

Gold Margins To Be Lowered, FOMC Rate Decision May Curb Demands

Fundamental Forecast for Gold: Neutral

Gold pared the decline from earlier this month, with the bullion advancing to $1542.05/oz, and prices for the precious metal may continue to push higher in the week ahead as the CME Group plans to lower margin requirements following Monday’s close. Indeed, heightening fears surrounding the European sovereign debt crisis sparked a flight to safety, which spurred demands for gold, and the mounting risk for a Greek default should help to prop up gold prices as the EU struggles to restore investor confidence.

However, the Commitments of Traders report from the U.S. Commodity Futures Trading Commission released for the week ending June 14 certainly tells a different story given a 4 percent drop in net long positions for gold futures. The data suggests market participants are scaling back bets for higher prices, although speculative longs outnumber shorts by 191,695 contracts, and the bullion may struggle to hold its ground over the following week as the Federal Reserve is widely expected to unwind the additional $600B in quantitative easing. As the central bank plans to withdraw liquidity, there certainly appears to a major shift in risk-taking behavior, and the recent strength in the U.S. dollar could gather pace as it benefits from safe-haven flows.

As the greenback remains the global trade currency, an appreciation in the USD could translate into lower prices for gold given the historically negative correlation between the two asset classes. In turn, the rebound in the bullion could be short-lived should we see increased demands for the U.S. dollar, and the greenback may appreciate further in the second-half of 2011 if the Fed shows an increased willingness to start normalizing monetary policy later this year. - DS

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