The Shine Coming Off Gold prices for Emerging Markets

Gold prices (GLDquote) in China are at an unreasonable level according to China’s largest gold producer, while prices fell in India, New York and London thanks to uncertainty over America’s fiscal cliff negotiations.

Image courtesy Sukanto Debnath:

A vegetable seller draped with gold in Sikkim, India

Gold fell by Rs 400 to Rs 32,000 ($580.13) per 10 grams in India’s bullion market today, following the end of  Diwali (the Hindu festival of lights) and India’s festival season, reinforced by a weakening global outlook.

Gold has fallen to a one week low in global markets after a report from the World Gold Council showed demand declined 11% in the third quarter from the previous year, thanks to China – the world’s second-biggest consumer after India, cut both investment and jewelry purchases.

Meanwhile an executive of China’s largest gold producer by output, Zijin Mining Group Co., says current gold prices in China are too high to sustain, and will hamper investment abroad according to China Business News.

Lan Fusheng, vice chairman of Zijin Mining, said in an interview with Dow Jones Newswires that “Prices have been boosted not only by people’s needs to hedge risks, but also by speculations.” He added that he thinks it would be sustainable for gold prices to stay at $1,200-$1,300 per ounce in the next few years.

Gold prices closed at $1,765 per ounce today, up roughly 34% from the low of $1,318 in January. Gold peaked at $1,890 per ounce in mid-August.

China Business News reports that Lan isn’t optimistic about gold prices or the global economic situation next year. If the European debt crisis remains, investors are likely to turn to the U.S. dollar and gold prices will decline accordingly, he said.

“Rising gold price is good to company’s profit, but it makes overseas investment more risky and much more expensive,” said Lan. 

Gold prices are likely to face selling pressure through the weekend given the political deadlock as Democrats play hardball with Republicans over the looming “fiscal cliff”, where Bush tax cuts worth $600 billion expire and are tied to deep spending cuts to defense and social programs which all kick in on January 1.

The Congressional Budget Office (CBO) estimates that if the game of chicken over austerity sees neither sides blinking, it will shave a hefty 0.6% off U.S. GDP growth next year, likely tipping the economy into recession in the first half of 2013.

What’s worth remembering is that the fiscal impacts of ‘going over the cliff’ are being somewhat overstated by many in the media. This is not like the debt ceiling debacle where the U.S. would default on its obligations on the day. Tax revenues are not collected on January 1 2013. Cuts to defense and social programs would take time to be phased in and ripple through the economy. The fiscal cliff is more of a slope, and investors would be wise not to join the panicking hordes when planning their gold investment strategy over the coming months.

Regardless, in an environment where investors are counting on the U.S. recovery continuing to firm in order to countervail European and Asian headwinds, even the slightest possibility of slipping into recession again is negative for market sentiment.

Investors and traders should closely monitor the war of words between the two political parties. Signs of persisting deadlock should amplify risk-averse tendencies. Gold is at further risk of declining as the negative mood boosts safe haven demand for the U.S. dollar, which puts downward pressure on metals denominated in the currency. 

Daily FX reports that gold prices are turning lower with resistance at 1732.33, the 23.6% Fibonacci retracement. Near-term support is at 1693.06, the 38.2% Fibonacci level, a barrier reinforced by a rising trend line set from late June (now at 1688.55). A drop beneath the latter level targets the 50% Fibonacci level at 1661.32. Alternatively, a push above resistance targets the 1790.55-1802.80 area.

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