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Fed gives gold bugs an inflation scare

The Federal Reserve is a bit more concerned about low inflation than in previous months, according to the minutes from the October meeting released Wednesday.  Gold prices for immediate delivery took another leg down and are on pace to decline for a second straight year.

Specifically the minutes stated "with regard to inflation, the staff saw risks both to the downside, that the low rates of core consumer price inflation posted earlier this year could be more persistent than anticipated."

Despite tepid inflation, a stronger dollar - now at a five-year high - and economic optimism, it’s really all a matter of supply and demand according to William Rhind, the CEO of World Gold Trust Services, an arm of the World Gold Council, which helps oversee the SPDR Gold Shares ETF  (GLD), the largest gold ETF in the world.

So who’s buying? Rhind says the Asian market is key and that “the biggest markets for gold from a pure consumer side are China and India.” The October through January months tend to see the most demand with Diwali celebrations in India and Lunar New Year festivities in China.

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Central banks have also become a driving market force over the years. According to Rhind, “Central Banks are very important for the gold market because they’ve become net buyers of gold over the last five years whereas previously they were net sellers of gold.”

And while sinking crude prices may give consumers more money in their pockets to put to work at the mall, Rhind says it’s not helping countries that export oil. There are “a lot of countries that export oil and get foreign exchange reserves primarily from sale of oil. If the oil price goes down those revenues will be lower and, therefore, they don’t have the amount of foreign exchange reserves that they may use to purchase gold or other currencies.”

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