why and How gold prices down on january 25 2012

why and How gold prices down on january 25 2012

Gold fell for a second day on Wednesday, ahead of the U.S. Federal Reserve's monetary policy decision and its first longer-term policy forecasts and under pressure from the dollar's strength against the euro.

Demand for gold in China has been suppressed this week by the Lunar New Year holidays, while in India, the world's largest consumer of gold, buyers held out for a larger decline in local prices, given the rise in the value of the rupee against the dollar, which cuts the price of gold for domestic purchases.

Together with the outcome of the Fed's two-day policy meeting, Thursday's expiry of February gold options <0#GCG2 > could have a bearing on the gold market.

Most open interest is clustered around downside put options, which give the holder the right, but not the obligation to sell gold at set price by a set date.

In the past month, the largest change in open interest has materalised in calls, which offer the bearer the right to buy gold, at $1,600 an ounce and puts at this same level, which could see a tussle between bulls and bears.

On the investment front, holdings of gold in exchange-traded funds have eased a touch this week, to around 68.993 million ounces, from 69.163 million a week ago, after outflows from ETF Securities' non-U.S. gold funds and the SPDR Gold Trust, the world's largest gold-backed ETF.

general sense is if there is going to be a surprise, it is maybe towards the market focussing on a rate hike and although it is a very, very long way off ... it will be interesting to see the impact that has on the gold market," Nic Brown, head of commodities research at Natixis said.

"There's a few things in the months ahead that could be supportive for gold prices. We note that despite all the crisis engulfing Europe last year, it is a U.S. fiscal mini-crisis over the budget ceiliing that virtually gave the biggest boost to gold prices. So if you're looking for potential upside in gold and other precious metals this year, you probably need to look to the U.S.," he said, adding his bank is forecasting an average gold price this year of $1,450 an ounce.

With little in the way of consumer demand for gold this week and the euro's struggle to claw back ground from the dollar as Europe's finance ministers and Greece's private creditors have yet to agree on the terms of Athens' debt restructuring, the gold price has fallen back from six-week highs.

The Fed meanwhile, will release its first long-term projections for monetary policy, which are expected to show policymakers do not believe rates will rise until at least 2014.

If the central bank can convince financial markets that it will remain on hold for longer than anticipated, long-term interest rates and the dollar could fall, which could offer a boost to gold.

Gold, which tends to move inversely to the U.S. dollar, is set for its first weekly decline in a month, but could get a lift if the Fed signals that a rate hike could be delayed.

Spot gold was last down 0.6 percent on the day at $1,655.99 an ounce at 1120 GMT, while the most-active U.S. February gold futures contract was down 0.5 percent at $1,656.00 an mure

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