Fundamentals "Supportive for Gold Bullion" as Quantitative Easing "Still Has Long Way to Go"

The gold price dropped to $1575 per ounce Monday morning in London, broadly in line with where it ended last week, while stocks ticked lower and the Euro held steady near two-month lows against the Dollar ahead of this Thursday's European Central Bank policy meeting.

"For gold, the trending and momentum indicators are pointing lower," says a note from UBS, "indicating any upside in the near-term must be limited."

Gold in Sterling dipped below £1050 an ounce, while gold in Euros fell back below €39,000 per kilo (€1213 per ounce) this morning as the Euro traded either side of $1.30.

"The political uncertainty in Italy is a good reason to be bearish on the Euro," says Saxo Bank currency strategist John Hardy.

"The ECB will be in defensive mode and they may cut rates this meeting."

On New York's Comex exchange, the so-called speculative net long position of gold futures and options traders – calculated as the overall difference between 'bullish' and 'bearish' contracts held by hedge funds and other professional money managers – rose in the week ended last Tuesday, a week after hitting its lowest reported level since 2008, weekly data from the Commodity Futures Trading Commission show.

The number of short gold futures positions held by professional money managers fell meantime. The previous Tuesday saw the highest number of short gold positions held by speculative traders reported this century.

The week ended last Tuesday saw gold fall below $1600 an ounce for the first time since August.

"Clearly, [futures market] participants were encouraged to re-position at these lower prices," says Standard Bank commodities strategist Marc Ground.

"From a risk/return perspective, we believe that the value in being short gold has declined substantially and that the largest part of the decline in the gold price has taken place already."

The world's biggest gold exchange traded fund, SPDR Gold Trust (ticker: GLD), continued to see outflows last week, with the volume of gold held to back its shares hitting a seven-month low at 1253.9 tonnes Friday.

"While ETF investors have been making a significant retreat from the gold market of late, demand for coins has not dropped off," says today's commodities note from Commerzbank, citing February's US Mint sales.

In China meantime, the world's second-largest gold buying nation, today's closing price for the Shanghai Gold Exchange's most popular gold forward contract was 320 Yuan per gram, equivalent to just under $1600 an ounce, a premium of around $20 an ounce over the international spot price.

"Most likely we will see banks bringing the metal onshore to take advantage of the wide spread," one Hong Kong-based trader told newswire Reuters this morning.

Gold dealers in world number one India meantime reported light demand as the Rupee touched a two-month low against the Dollar.

Silver dipped below $28.70 an ounce this morning, while other industrial commodities were broadly flat.

In the US, interest rates are likely to stay near record low levels until the economic situation improves significantly, Federal Reserve chairman Ben Bernanke said in a speech on Friday.

"In the current environment," Bernanke told an audience in San Francisco, "both policymakers and market participants widely agree that supporting the US economic recovery while keeping inflation close to 2% will likely require real [inflation-adjusted] short-term rates, currently negative, to remain low for some time."

In the UK meantime the Bank of England could announce a further £25 billion of quantitative easing when it makes its latest policy decision this Thursday, according to a note from Standard Bank.

The nominee to be next Bank of Japan governor, Haruhiko Kuroda, said Monday the BOJ "will do whatever we can do" to end deflation in Japan.

Speaking at his confirmation hearing, Kuroda added that the central bank has not bought enough assets and should buy longer-dated bonds, saying it should send a clear anti-deflationary message.

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