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India Trade Requirements Limit Prospects for Gold Rally

Stocks in this article: GLD

NEW YORK ( TheStreet) -- Gold prices are showing some bounce after the initial market declines that followed Federal Reserve Chairman Ben Bernanke's congressional testimony last week.

Bernanke essentially suggested that it is too early to know when the Federal Reserve will start making reductions to monetary stimulus programs. The uncertainty created by the directionless commentary generated a selloff in gold.

But the prospect of continued stimulus is ultimately bearish for the dollar and positive for gold, as the metal shows a strong history of inverse correlation relative to the U.S. currency.

The latest strength has sent gold prices through closely watched technical resistance levels at $1,330 per ounce, and this is leading to renewed speculation that this year's bear trends have bottomed out.

Short-term rallies in gold have generated highs near $1,340 per ounce, posting single-session gains of more than 3%. Daily moves of this magnitude have not been seen since June 2012, so when we look at things from a short-term perspective, it can be easy to buy into the optimism and start projecting larger runs higher.

But before we look at these moves as a new buying opportunity, we should note some of the factors that could stall any rallies that might be seen into the end of the year.

The latest example can be seen in announcements that India will place additional restrictions on gold bullion imports. India was the world's largest gold consumer last year, and these restrictions should have a bearish impact on market prices, as measures to curb demand create negative scenarios when we look at the bigger picture.

Specifically, these measures will require 20% of all imported gold lots to be made exclusively available for export, and will be applied to all forms and purities of the metal (to include everything from unrefined gold to minted coins).

Gold importers in India will be allowed to supply jewelry businesses and outlets selling to jewelers, but 20% of the initial shipment will be held in customs bonded warehouses. Those importers will not be able to make new overseas purchases until 75% of that deposit has been exported. This will likely result in declines for in-bound shipments of gold bullion for the third and fourth quarters, as these required impositions reduce incentives and limit major centers of global market demand.

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