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Gold Price Falls as India Blocks Gold Imports, Stock Markets Rally, But Analysts See Possible Jump on Short-Covering

The WHOLESALE gold price slipped back below $1400 per ounce Tuesday morning in London as world stock markets rose and the Indian government tightened restrictions on gold importers once again.

After Monday's weak US manufacturing data gave gold what Commerzbank calls "sufficient fuel" to touch the $1415 level – identified by some technical analysts as key resistance – the gold price dropped $8 in 15 minutes mid-morning.

With immediate effect, "Any import of gold on consignment basis [where the buyer has yet to pay for the gold] shall now be permissible only to meet the needs of exporters of gold jewellery," the Reserve Bank of India said in a statement.

The world's #1 consumer market for physical gold, India recorded a trade deficit worth $17.8 billion in March – equal to 11% of economic output.

Some 40% of March's deficit was due to gold bullion imports.

"There's no doubt that India is a strong demand market for gold," says Manne Rasmussen, an analyst at the $650 million Vontobel Belvista Commodity Fund in Zurich, quoted by the Wall Street Journal yesterday.

Rasmussen says India's surging gold demand was a reason Vontobel recently closed a bet on the gold price falling.

India's government yesterday corrected the 262 tonnes of gold imports reported for May by Finance Minister P. Chidambaram to 162 tonnes.

That was still more than all Indian gold imports during April to June 2012, however.

"Physical buying in India [was] virtually non-existent" Tuesday morning, said brokers Marex Spectron in a market note, "and Chinese demand is much smaller above $1400."

"A recovery in the stock market is [also] currently a negative factor for gold," Peter Fertig at Quantitative Commodity Research Ltd told Bloomberg today.

With developed world stock markets gaining 14.5% so far in 2013, according to Reuters data, the gold price has dropped 15.7% and silver bullion is down more than 25%.

Western households cut their demand for physical gold in May from April's 16-month high, but remained positive according to Bullion Vault's latest Gold Investor Index.

"There is a case to be made for a short-covering rally in the near term," says TD Securities in Toronto, pointing to the record-large bearish betting by speculative traders in US gold futures and suggesting a possible move "into $1500 per ounce territory."

Thursday's interest-rate decisions in London and Frankfurt, plus Friday's US jobs data, "[are] likely to keep price action choppy," says Credit Suisse.

"Add in a dash of short-covering and it would not be too surprising to see gold reach the next technical resistance level of $1422/24 in the next few days, perhaps even $1445/50.

"However, we think that any short-term rally will be limited."

Fellow London market maker UBS agrees, saying that "Gold is seemingly becoming less relevant in the current environment...prompting specs to take an aggressive short position in gold."

If Friday's US non-farm payrolls report is weaker than analysts expect, "The dominance of shorts increases the risk of a short-covering rally" in the gold price.

Stock markets rebounded worldwide meantime Tuesday morning, with Japan's Nikkei index regaining half of Monday's near-4% drop.

Turkish equities also rose sharply, as did the Lira and Ankara's government bond prices, despite fresh anti-government protests across the country.

One protester died Monday in the city of Antakya, near NATO member Turkey's border with war-torn Syria.

Despite prime minister Erdogan flying out to a planned meeting in Morocco, police today deployed water cannon around his official residence.

Turkey imported 43.5 tonnes of gold in May, according to the Istanbul Gold Exchange, just shy of April's 5-year record.

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

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