Gold yet to shows direction in short term

Gold declined, spurring storing demand

The precious metal rarely moved in the second week because after topping a record high of $1,575 an ounce at the beginning of May, gold plunged due to selling pressure of many major funds, the excitement after terrorist Osama Bin Laden’s death, the rally of the US dollar against the euro because of the European sovereign-debt turmoil.

However, the metal mainly remained on rising trend. Thus, storing demand was boosted when the prices fell, paring losing momentum of the precious metal, especially at key technical levels $1,526, $1,478, $1,460, according to an analysis of Fibonacci Retracements. Accordingly, each broken support level became a resistance level. The metal showed no clear direction in short term, so it must surpass the resistance level of $1,526 to escape from the losing trend or it would be inevitable for the metal to challenge the level $1,460 an ounce again.

In long term, the market continued to keep close watch to movement of the US Federal Reserves, especially since June when the second quantitative easing package expires. Meanwhile, global economy still signaled signs of uncertainty while none of the major currencies showed that it can replace the role of the greenback. Meanwhile, the reluctant and cramped dependence of the greenback on the behaviors of Fed proved the importance of the precious metal. If the confidence in the currency is eroded, the gold standard system will occur the second time in the history for that gold may climb to $2,000, or $3,000 an ounce.

Bullion remains attractive in long term?

Another pressure was put on bullion as regulations that ban mobilizing and lending by gold took effect since the beginning of May. In comparison with global prices, domestic prices were more hesitative. Thus, despite tensions caused by recent monetary policies, buying demand for the metal at VND37.3 million was still strong. Therefore, the rate was rather stable around VND37.4 million a tael. This was explained by the habit of storing gold of people, which was supported by the rising trend in several years of global prices.

In a few past weeks, the gap between domestic and global prices was not very wide. Domestic gold prices sometimes were lower than global prices. The demand to invest in gold dropped mainly because of a high interest rate of Vietnamese dong. In general, high interest rate not only reduced the need to invest in gold but also in other commodities, including: real estate, and securities. The most highlighted movement in the monetary market was that the central bank raised the US dollar’s buying price to VND20,700 while the greenback was trading at VND20,500 on the market.

According to some analysts, the central bank aimed at three targets with this movement. First of all, as the greenback sharply dropped, with a favorable supply, it is a good chance to buy in the US dollar to improve the country’s foreign currency reserves which had been strongly consumed during the past three years. Secondly, banks will have to spend a large amount of Vietnamese dong to buy dollars on the market, which means the liquidity of the Vietnamese dong needs to be interfered. Third, the losing momentum of the US dollar exchange rate against the Vietnamese dong had been curbed by rising the greenback’s buying price. Since, if the exchange rate continues to decline, it will cause disadvantages to local exporters. Meanwhile, trade deficit developed complicatedly in the first four months of this year.

At the same time, the central bank made an important decision to increase operating interest rates, and continue to tighten the monetary policy to control inflation. However, it is impossible for the central bank to meet all the three goals as exchange rate, interest rate, and inflation are impossible trinity which has an intimate connection to each other but cannot achieve at the same time. Currently, keeping high interest rate for a long time may cause bubbles on real estate and stock market to break; Inflation reached 9.64 percent in April; whereas only the exchange rate was stable recently. Thus, in order to save the first two factors, the central bank has to sacrifice exchange rate. If the exchange rate surges again, domestic gold will hardly decline further.

For these, gold remained an attractive investment channel in long term. However, investors should stay calm to choose the right time and reasonable prices to jump in the bullion market.