Gold prices decline on risk sentiment reversal

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The past week saw second consecutive weekly decline for gold, the like of which hasn’t been seen since the last two weeks of June. Risk sentiment reversed when major central banks worldwide battled to coordinate a plan to bring funding to European banks in a bid to mend the euro sovereign debt crisis.

Spot gold is at a three week low and may decline further, according to some market analysts. “We favour maintaining our negative trading affair bias in today’s trade,” commented Tom Pawlicki, precious metals and energy analyst at MF Global. “Additional pressure will come from low expectations for Quantitative Easing at next week‹s FOMC meeting, and from technical factors which argue for a move down to $1,700 – $1,750 an ounce in our opinion,” he added as gold looks set to record the largest weekly loss since October 2008.

The volatile markets has led to an increase in trading of ETFs, especially evident in India, the world’s largest consumer of gold. According to data from the Association of Mutual Funds in India, the yellow metal’s ETF assets exploded to $1.58 billion in August compared to $55 million in the same month a year ago. “Gold ETFs have given a double digit return over the last two years, as against other equity funds that have remained almost flat in terms of returns,” said Suresh Kalavalkar, bullion analyst. “In the month of August, gold ETFs in India have given investors the highest ever monthly return of over 15%,” he added.

According to the World Gold Council,  demand for gold is expected to strengthen by the end of 2011 driven by jewelry buying in India and China and recovery in investment demand. Jewelry buying in the two largest countries, which together account for 55 percent of global jewelry demand, remains strong in the short and longer term as the number of wealthy people grows.

“In the third quarter, we are going to see strong investment numbers, because of the European crisis, the debt downgrade in the United States and poor economic figures coming from the United States, which have created a concern in investors’ mind that we may be heading back to another recession,” WGC Managing Director for Investment Marcus Grubb told Reuters. Economic worries have fueled investment into gold bars and coins on the western markets in the third quarter, according to him.

Central banks, which have purchased 198 tons of gold to boost reserves in the first six months of this year, have kept buying in the third quarter and are expected to continue this trend later in the year.

In addition, it is unlikely that the heavily indebted European counties will sell their gold reserves, because the reserves are merely a pittance when compared to their mountain of debt.

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