Spot marketgold prices fell briefly below $1,690 an ounce Wednesday morning in London trading, remaining close to six-month highs, while stocks and commodities were also broadly flat, ahead of tomorrow's policy announcement from the European Central Bank.
Silver prices dipped below $32 per ounce before recovering, ending the morning over 1% up on the week so far.
"The next resistance is at $1,700," says the latest technical analysis from bullion bank Scotia Mocatta.
Spot gold prices briefly touched that level on Tuesday, following the release of the latest ISM purchasing managers index data.
The ISM data show U.S. manufacturing activity contracted in August for the third month in a row, prompting further speculation about the possibility of a third round of quantitative easing from the Federal Reserve, whose policymakers meet next Tuesday and Wednesday.
"[The ISM report] gives the Fed another green light to launch QE3 next week," reckons Paul Dales, senior U.S. economist at consultancy Capital Economics.
"Will QE really come?" asks Dominic Schnider at UBS Wealth Management.
"It is a little too early to go full throttle...policymakers are heating things up, but will what eventually comes out to be as big as the market is looking for?"
The volume of gold held to back shares in the world's biggest gold ETF, the SPDR Gold Trust (GLD), rose to its highest level since March 19 yesterday, hitting 1293.1 tonnes. Total gold ETF holdings meantime set an all-time record Tuesday, according to newswire Reuters.
On the New York Comex, open interest in gold futures rose to six month highs yesterday, although we will not know the balance of bullish and bearish positions until the weekly Commitment of Traders report comes out at the end of the week.
In Europe meantime, the ECB and Bank of England are due to make their latest policy announcements tomorrow. Earlier this week, ECB president Mario Draghi reportedly told a committee of European Parliament lawmakers that he favors buying sovereign bonds of up to three years in maturity on the open market.
"We expect the ECB action to be supportive of gold," says today's commodities note from Standard Bank.
"A stronger Euro and weaker Dollar could see gold move above $1,700."
Over in India, traditionally the world's largest gold buying nation, there are fears of another rise in gold import duties.
"The government may look at increasing the duty to 7.5%," says Prithviraj Kothari, president of the Bombay Bullion Association.
"Any such move will hit demand in a big way."
"Any increase in duty will play havoc on the industry," agrees Bachhraj Bamalwa, chairman of the All India Gems & Jewellery Trade Federation.
"The industry is grappling with high gold prices and demand is slow."
Rupee gold prices set another all-time high on Wednesday, as the Rupee fell to a six-week low against the Dollar.
Indian gold jewelry demand however is set to rally in the second half of 2012, after falling to three-year lows in the six months to June, precious metals consultancy Thomson Reuters GFMS said Tuesday.
GFMS, which published its Gold Survey 2012 Update 1 yesterday, added that it expects gold prices to breach $1800 by the end of this year, with gold investment forecast to hit record levels and central banks expected to add a further 220 tons of gold to their reserves, following the 273 added in the first half of the year.
"I think we're on pretty safe ground saying that we've already seen the lows for the year and that firmer prices, particularly towards year-end, are on the cards," said GFMS global head of metals analytics Philip Klapwijk.
"But we're also expecting a bumpy ride...any intensification of the Eurozone crisis or dashing of hopes for further easing by the Fed and you could easily see the rally derailed for a while."
Ben Traynor
BullionVault
