The Hindu Business Line : Selling pressure on dollar to help gold

Beyond fundamentals, psychology and expectations played a big part in gold price movements since the beginning of the week. After the dollar failed to hold on to its gains following the FOMC decision to keep interest rates unchanged, gold slipped lower.

While the interest rate decision was largely expected by the market, its accompanying statement turned out to be more dovish than many had anticipated.

Justifying pause

The reference in particular to "moderating inflationary pressures over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand" can be read not only as justifying the pause but also as raising the likelihood that the rates will be on hold at the next meeting in September as well, an expert argued.

Experts see this as being bearish for the dollar because of the seeming willingness on the part of the Fed to live with the upside risk to inflation. There will be increased likelihood of renewed selling pressure on the dollar.

For this reason, the sentiment towards gold should remain firmly underpinned in the months ahead, analysts predicted.

Weak physical demand

Nevertheless, continued weak physical demand due to current high and volatile prices poses a major downside risk for gold. In the first quarter this year, demand was hard hit and the trend is likely to continue.

Interestingly, prices had eased back on Tuesday closing 0.6 per cent lower, amid cautious investors ahead of the FOMC meeting.

Nevertheless, a fall in the dollar soon after the Fed decision to leave interest rates unchanged - the USD/EUR hit a low of 1.2894 - prompted investor interest towards the metal, pushing prices to an intra-day high of $649 an ounce on Comex.

The sell-off in the dollar was short-lived, however, and gold prices soon came under pressure sliding below $ 640/oz at New York's close.