Gold Set to Drop as Soft Oil Prices Curb Demand for Inflation Hedge

Gold prices are set to drop next week as weak oil prices are expected to tame global inflationary pressures in the short-term, reducing the demand for the metal as an inflation hedge.

Traders will be tracking the Swiss gold referendum due on 30 November, which polls claim will fail. The result of the Swiss vote is expected at 1200 GMT this Sunday.

They will also be tracking US employment data due out on 5 December.

As many as 11 of 19 analysts polled in a Kitco Gold Survey said they expected gold prices to trade lower next week, while five predicted that prices will rise and three forecast prices to trade sideways.

Colin Cieszynski, senior market strategist at CMC Markets, told Kitco: "I suspect the 'no' side will win the Swiss referendum on Sunday and as we saw with the oil collapse after the Opec meeting, gold could be vulnerable on a 'no' vote.

"Also, the crude oil crash means lower inflation pressures for the foreseeable future, reducing demand for gold as in inflation hedge. Finally, I think the [European Central Bank] is going to do nothing at its meeting next week and put any decision on more stimuli off to 2015, removing another pillar of support from gold."

"It's possible gold could retest the November lows in the $1,130-$1,150 zone sometime in early December with a perfect storm starting to swirl around gold," Cieszynski added.

Peter Hug, global trading director with Kitco Metals, said: "On the caveat that the Swiss do not vote yes, I believe the market will be down next week. I believe the [US dollar] trend again re-asserts."

Gold Ends Up

US gold futures for delivery in December finished $21.40, or 1.8%, lower at $1,175.20 per ounce on 28 November.

Prices ended slightly higher for the month as a whole.

Spot gold traded 1.9% lower at $1,168.56 an ounce on 28 November.

India Eases Curbs

India, on 28 November, scrapped a rule tying gold imports to exports, a move that could now raise legal shipments into the world's second largest bullion consumer after China.

Alongside a record import duty of 10%, the Indian government's so-called 80:20 import rule had demanded that traders export 20% of all gold imported into the country. The rule was aimed at lowering inbound shipments and reducing the nation's current account deficit.

Capital Economics said in a note to clients: "...Even if India's gold imports do now pick up, lower commodity prices should keep current account deficit under control.

"Restrictions on gold imports came into force in August 2013, when the current account deficit had gone up to 5.5% of GDP. The large deficit was a key factor in the rupee's slide against the US dollar."

"As we recently noted, the falls in gold and (more significantly) oil prices over the past few months have substantially reduced India's import bill. Even if India's gold imports now pick up, the threat of the current account deficit ballooning to previous levels is slim," the firm added.