Short Term Outlook "Bearish" for Gold Bullion Ahead of Fed Meeting, But "Long Term Backdrop Bullish as Liquidity Grows"

Gold Bullion edged back above $1660 per ounce Tuesday morning, broadly in line with where it ended last week, as stocks and commodities fell slightly and the Dollar ticked higher against the Euro ahead of tomorrow's interest rate decision from the US Federal Reserve.

"We are seeing a technical rebound following a few days of price decline," one trader in Shanghai told newswire Reuters this morning.

"In the short run, gold is still going to drift without much conviction, though over the longer term it is still facing very heavy pressure on the upside."

"We have neutralized our medium term forecast and also now have a short term bearish outlook," says Commerzbank senior technical analyst Axel Rudolph, citing gold's failure to breach its 55-day moving average at $1696 an ounce.

"The $1625.77 level is still key for the medium term trend. Failure here could provoke a sell-off to below the $1600 level."

Like gold, silver regained some ground this morning after losses in recent days, climbing back above $31 an ounce.

Here in London, the FTSE 100 retreated from five-year highs this morning, as other European stock markets also dipped slightly.

In the US, the Federal Open Market Committee begins its two-day meeting today ahead of the Fed's latest policy decision tomorrow.

"This week's FOMC meeting and US non-farm payrolls [on Friday] will be key in setting gold's price trajectory," says a note from Barclays Capital.

"[Minutes from last month's] FOMC meeting [show] that some FOMC members are looking for an exit to further asset purchases before the end of 2013," says the quarterly preview from Standard Bank's commodities desk.

"If the Fed stops its quantitative easing program, it should temper some of the upside for gold and silver – at least in US Dollar terms – relative to an environment where the Fed still expands its balance sheet...but to us, the Fed's balance sheet is only one piece in a bigger puzzle of growing liquidity and negative real interest rates."

The Fed will continue with $85 billion a month of asset purchases – comprising $40 billion of mortgage-backed securities and $45 billion of government bonds – until the first quarter of 2014, by which time it will have bought $1.14 trillion worth, according to the median estimate in a survey of economists conducted by news agency Bloomberg.

"To get to the point where Bernanke would be comfortable letting up, you have to have a good solid string of economic reports [this year] that you're just not going to get," says Eric Green, global head of rates and FX research at TD Securities in New York.

"The Fed is resuming rapid expansion of the monetary base," says Don Coxe, former strategy advisor at BMO Financial Group, in his final issue of his monthly BMO strategy journal 'Basic Points'.

"Japan will soon be flooding the currency markets with Yen. The European Central Bank remains expansionary...it is almost impossible to conceive of a more bullish long-term backdrop for gold."

Coxe also sees demand from India and China, two countries that account for around half of world gold demand, continuing to support gold prices.

Indian exports of gems and jewelry are expected to rise by 15% this year to more than $44 billion, with silver exports seen jumping 30%, according to Pankaj Kumar Parekh, vice chairman of India's Gems and Jewellery Export Promotion Council.

"At such high prices, gold is going out of budget for many youngsters," says Parekh.

"A wrist bracelet of white gold is now replaced with sterling silver as it is cheaper."

BullionVault: the safest gold at the lowest possible price...

Buy gold at the lowest prices in the safest vaults today...

The London Gold Market Report is the daily market review from BullionVault, the world's largest physical gold and silver market for private investors. A full member of professional trade body the London Bullion Market Association, BullionVault publishes the LGMR every day that the market is open, bringing you insider comment and analysis from the very center of the world's $240 billion-a-day physical gold trade, and putting the latest gold price action into its wider financial and economic context

See full archive of the London Gold Market Report.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News, RSS links are shown there.