Economist Shayne Heffernan takes a look at Gold, Silver and the US Dollar and the impact of Indian Taxes

The customs duty on gold was doubled in India this week, which resulted in the price falling for the third week in a row as demand fears grow. Investors have pushed the market lower to test the 1660 trend of higher lows from the 700 base of November 2008.

In India from the year starting April 1 taxes will rise to 4% from 2% on gold bars and coins as well as platinum.

The three biggest imports in India are Oil, Gold and Silver. As silver was left out of the latest budget tax increase it may benefit from speculative plays and the spread between gold and silver should narrow.

During the last three years Gold has fallen to test the long term trend from 2008 three times.

The most severe test was in December 2011 when the precious metal fell seventeen dollars beneath the trend and closed beneath it for one week. However, then the market attracted buyers and the pattern of buying dips has continued since.

A break beneath the trend at 1650.4 next week will have to be sustained by continued weakness for two complete weeks to trigger sustained losses. Finally, the prospect of further US growth and the declining chances of another round of quantitative easing this week was not something that gold bulls wanted to hear.

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HCM Gold Chart

Silver

The recovery in silver has been helped by a new tax on Gold and Platinum announced when the Indian finance minister revealed his budget for 2012, this week. Silver has remained outside the double tax on the other precious metals and ay benefit from a spread narrowing between gold and silver. However, for the market to confirm a more prolong recovery, a break above 32.86 is needed next week.

This would see the negative trading pattern since the beginning of the month moderate and generate buying interest for a retest on 34.45, the March 9 high. Above this area the outlook for silver would improve considerably. However, failure to hold above last week's base at 31.62 would indicate that bearish investor sentiment is strengthening and traders would shift their focus to 30.75 and 30.00.

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HCM Silver Chart

US Dollar Outlook

The largest rise in US consumer prices in ten months did not cause Treasury yield to rise. However strong jobs data and continued signs of growth in the US economy as well as concerns about the inflationary threat of energy costs saw US ten year yields make the most sustained advance in six years last week. All markets are very nervous about inflation. The interest rate forward curve is now predicting a 25bp rise in US rates in the third quarter of 2013 instead of no change in rates until the final quarter of 2014.

The prospect of a further round of US quantitative easing now looks more distant. Growth is what the markets want to see out of the US but not inflation. The worst combination is limited growth and higher inflation, as the measures need to address inflation will suppress growth.

With yields still not far from their all - time lows across the US yield curve, people should be looking for Inflation protection.

Last year in crisis markets many choose to buy bonds and not stocks. This year equities are proving resilient as higher inflation may give companies the opportunity to grow margins. So far the official response from the Fed suggests that the recent advance in energy costs will be temporary and overall inflation is expected to remain subdued.

At the end of the week treasures traded sideways and the dollar fell as the consumer price data was not as strong as forecast. The currency market is still very fragile and while so many analysts have predicted a one way bet in the dollar this year, experience shows that the slightest let - up in dollar positive news can invoke very strong selling.

This week the Greek debt deal did not dominate headlines but there was news of the prospect that the bailout fund for European debt may now grow to €700 billion from its current €500 billion level. This would help to narrow the spread further between the yields of peripheral debt burdened economies and the core well capitalised economies. The popular US recovery plays are oil and dollar / yen. Here the on - set of the driving season increased confidence amongst US consumers about purchasing big ticket items like cars and the prospect of continued employment growth have underpinned the market. The widening yield differential between the US and Japan also underpins the recovery in dollar / yen.

Next week attention on the data calendar will focus on German producer price index on Tuesday and the release of the Bank of England minutes on Wednesday. In the US housing data is expected to dominate the week's calendar.

Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.