Bulls return to bullion after Bernanke comments

Amid declining gold prices, sentiment improves as Fed chairman signals stimulus will continue

PUBLISHED : Saturday, 25 May, 2013, 12:00am
UPDATED : Saturday, 25 May, 2013, 2:53am

Gold traders are the most bullish in a month after Federal Reserve chairman Ben Bernanke signalled record stimulus will continue until the economy improves.

In a survey, 12 analysts expect prices to rise next week, with nine bearish and eight neutral, the highest proportion of bulls since April 26.

Bullion is poised for its first weekly gain in three and trading and investment company Degussa Goldhandel said demand this month will be double the first-quarter average.

Investors have so far this year sold 463.4 tonnes of bullion valued at US$20.8 billion from exchange-traded products as some lost faith in gold as a store of value amid an improving United States economy and rally in equities. While prices entered a bear market last month and hedge funds are making the biggest ever bet against the metal, the slump is boosting jewellery and coin sales.

"Gold should still be in demand as an alternative currency," said Daniel Briesemann, a commodities analyst at Commerzbank in Frankfurt. "The quantitative easing by central banks should lead to a depreciation in rates for major currencies and in the end should also lead to some inflation concerns, although this is not an issue at the moment."

Bullion rose as much as 2.8 per cent and then fell as much as 1.6 per cent on May 22 after Bernanke expressed concern to Congress that federal budget cuts were blunting the recovery.

He said the pace of bond purchases could be reduced in the next few meetings if the jobless rate keeps dropping.

Many Fed officials said more progress in the labour market is needed before paring the US$85 billion in monthly purchases, minutes of their last meeting showed the same day.

After touching a two-year low of US$1,321.95 on April 16, gold gained 2.5 per cent this week. Purchases outpaced sales by nine to one after prices began the slump in mid-April, compared with four to one in the first quarter, said Wolfgang Wrzesniok-Rossbach, the chief executive of Degussa.

Sales this month will be about double the first-quarter average, he said from Frankfurt. The US Mint sold 209,500 ounces of coins last month, compared with 62,000 ounces in March.

Central banks also may help boost demand for bullion as they expand reserves. Nations from Brazil to Russia added 534.6 tonnes last year, the most since 1964, and may buy 450 to 550 tonnes this year, according to the World Gold Council in London.

The money printing by central banks has helped send US equities to records while failing to spur inflation. Expectations for increases in consumer prices, as measured by the break-even rate for 10-year Treasury inflation protected securities, fell 8.4 per cent this year, reaching a nine-month low on May 17.