Gold markets likely to witness volatility

Gold almost touched $1,000 an ounce last week but met with stiff resistance around the $996-level. The yellow metal slipped to around $965 towards the middle of last week before making some grounds to close at $974.20. Gold still seems to be supported by the weakening dollar and falling equity markets. It is one of the reasons why it is eyeing the $1,000-mark. However, it faces stiff resistance at $993 and if it is able to get past that, then there should be stiff resistance again at the $998-1,000 range. Support for gold is seen around $980.What, in short, the market is likely to witness is volatility due to various factors. While key economic factors would be trying to drive it past the $1,000-mark, need for liquidity and profit booking could be the resisting factors.
To gold’s advantage, the sharp fall in the equity markets is likely to see investors queuing up for the precious metal. However, on the other hand, demand for physical gold, including in India, could be subdued due to the high prices. Most likely, investment and exchange-traded funds would be the ones that could show more interest in the yellow metal.
Not surprisingly then, last week the holdings of the exchange-traded funds was up by over two per cent.
According to brokerage firm Angel, the fundamentally weaker dollar and fear of more interest-rate cuts by US Fed should support gold’s allure. The outcome of the March 18 Fed meeting is keenly awaited by market participants. In the medium term, supply and demand factors, dollar weakness, institutional buying, the price relationship between gold and crude oil (which is trading at record highs), and global economic uncertainty, are the key factors that will determine prices in the future.
The fed funds rate is now lower than the inflation rate, so there’s a negative real interest rate. In the longer run, investors could turn away from paper assets with declining value and turn toward assets with real value. This will provide a shot in the arm for gold. Also, increased volatility in the world financial markets and a possible recession in the US economy could boost flight to quality buying in gold, according to Angel.

Link Business Line