Physical demand for gold from Asian consumers may be showing some modest signs of stabilization but the buying interest so common at this time of year during religious festivals and the wedding season still won't be strong enough to lift prices above $1,800 an ounce, strategists said.
India and China are collectively the world's largest gold buyers, contributing 45 percent of total global consumption in the second-quarter of 2012, but the global economic slowdown has hit sales and undermined the stimulus-driven rally in bullion prices. Gold jumped to an 11-month high above $1,795 in October after the Fed's stimulus plan but retreated after failing to break $1,800. It is down more than 3 percent for the month.
"$1,800 remains a formidable barrier on the upside," wrote Tom Kendall, the head of precious metals research at Credit Suisse, in a report Tuesday. "A break through that level will likely require a combination of improved demand from Indian and/or Asian physical dealers plus renewed Fed purchases of Treasuries outright once Operation Twist expires at the end of the year."
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Indian gold demand, Kendall noted, has shown only "sporadic" signs of strengthening. "With the end of the festival season (traditionally marked by the end of Diwali, or the 'festival of lights') just over two weeks away, we can say with some confidence that this year will be one of the weakest for Indian gold imports in the past seven years."
Robin Bhar, the head of metals research at Societe Generale, is less pessimistic about the outlook for Asian demand. He noted in a Tuesday report that the recent drop in gold prices reflected weaker investor appetite but the resulting softer prices were attracting bargain-hunters in the physical market.
"The balance of interest may be shifting in the short term, away from professional investors who have been active in Q3 (and helping to drive the price higher), while their retreat, and associated price fall, is now starting to entice fresh physical interest," Bhar wrote. Outside India and China, and elsewhere in Asia, "physical demand remains keenly attuned to price movements, but there are signs now of some bargain hunting on any approach to $1,700."
Meanwhile, the onset of the major festival seasons in India – Dussehra (a Hindu Festival celebrated every year in India in the month of September or October) was last week and Eid (Eid al-Adha, a four-day Islamic festival, that started on Oct. 26) is under way – "has prompted good jewelry and coin demand," he said.
Still, whether that demand stays strong during the critical Diwali festival, which culminates on Nov. 13, remains an open question. Early signs, however, appear encouraging. "Recent local news is that stockists and traders are back in the market following a tentative price stabilization" just below 30,000 Indian rupees per 10 grams.
Tactically, many strategists recommend accumulating gold on any pullbacks below $1,700. Though still a long term gold bull, Warren Gilman, CEO of CEF Holdings in Hong Kong, said he's looking to buy on the dips. "I believe gold will not hold $1,700 and I will be able to enter again close to $1,600."
Global central banks have continued to buy gold to diversify their assets – most recently Brazil and Turkey – and holdings in exchange-traded products (ETPs) "continue at lofty levels," Gilman said. "But prices have not responded to this support and I am not confident Indian buying this season will be particularly supportive."
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Assets in exchange-traded products (ETPs) in the commodity sector reached a record of $207 billion in the third quarter, driven by gold products as central banks launched new stimulus programs, ETF Securities said on Oct. 8. Assets in gold ETPs hit a record $151.4 billion in the quarter.
Frank Holmes, CEO and CIO of money manager U.S. Global Investors said he would buy more bullion on any decline to $1,650, adding Toronto-listed Goldcorp, the No. 2 Canadian gold miner, and Franco-Nevada "look very attractive" over the next 12 months.
Goldcorp reported a 48 percent increase in quarterly profit on Oct. 25, as improved performance at its Red Lake and Penasquito mines led to strong gold and silver sales.
Forming the contrarian view, Nader Naeimi, Senior Investment Strategist at AMP Capital in Sydney said that though $1,800 did form "pretty strong resistance," the metal had potential to breakout by the end of this year.
"Asian buying physical demand is picking up and investment demand is likely to be quite strong in an environment where you have very low real interest rates, you have QE3 and you have monetary easing across the globe," Naeimi told CNBC's 'Squawk Box'.
Over the past several months, lending rates have been guided lower "29 times or so by various central banks" globally, he noted. "So in that environment the financial demand will be there, and also the correlation with the U.S. dollar. U.S. dollar looks like it's going to renew its down-leg and I think the inverse correlation with gold will push gold prices higher and I think gold can break above $1,800 by the year-end."