Comex Gold Futures firmed up from recent dips on some short covering and bargain hunting, and even some fresh safe-haven demand, as odds of the US Economy (Though temporarily) going over the so-called Fiscal Cliff have increased, particularly after last week’s failure on a deal. Gold Prices have benefited the most from the ultra loose monetary policy of leading central banks because of Gold’s appeal as a hedge against inflationary fears, which is generally seen after massive money printing. That is why Gold investors are keeping a close eye on talks to avert a fiscal crisis in the United States. Favorable US economic data could signal prospects for an end to the ultra-loose monetary policy that has supported Gold Prices. The better the data the more the fear that monetary easing will ultimately come to an end. The number of Americans filing new claims for unemployment aid fell last week to nearly its lowest level in 4 1/2 years, a possible sign that employers have picked up the pace of hiring.
The United States faces $109 billion in across-the-board spending cuts starting in January unless a deal is reached to either replace or delay them. Democrats want to switch the spending cuts to tax increases for the most part. If the politicians reach an agreement on the fiscal cliff, the dollar could suffer and there could be more investment into Gold. A failure in the fiscal talks could spur safe-haven buying, boosting Gold Prices. Senate Majority Leader Harry Reid on Thursday criticized Republicans in Congress for refusing to go along with any tax increases as part of a fiscal cliff remedy as he sketched out a pessimistic outlook for this week.
Lack of Fresh QE will be negative for Gold Prices:
As announced at its December meeting, starting in January, the US Federal Reserve will continue its third round of Quantitative Easing – QE3, purchasing $40 billion per month in MBS – Mortgage Backed Securities. Additionally, the Fed will purchase $45 billion of Treasury debt each month (continuation of Operation Twist) to total $85 billion per month. If the US Economy picks up in 2013 (Bouts of Illusion), the Fed could slow down its bond purchases, but I don’t think they will end them anytime soon. The US Federal funds rate, its main policy rate tool, remains at the exceptionally low level of zero to 0.25% and there are no expectations that will shift in 2013. If the US Economy starts slowing down due to the new Fiscal Cliff implications or the new Tax Hikes or if unemployment starts rising, the US Federal Reserve will now have to think hard before adding new QE or printing more money as that would then increase deficit & increase taxes. This in itself will take away the biggest supporter of Gold Prices from the markets as the US will no longer be able to afford new QE or fresh infusion of money. The US Federal Reserve surprised markets at the last meeting for 2012 in mid-December meeting with a change in its communication policy. Instead of a calendar date, the Fed shifted the forward guidance to the conditions needed to keep the federal funds rate at the current exceptionally low levels. The Fed initiated thresholds for unemployment and Inflation expectations. The Fed stated that it plans to keep its low federal funds rate at zero to 0.25% as long as the unemployment rate remains above 6.5%, with 2.5% or lower inflation projections for one to two years out. If the US does go over the Fiscal Cliff, the US Economy will take a hit & unemployment will rise. The Fed may simply continue its currently running QE size & rate policy but will surely defer to increase or introduce fresh QE. Any fresh QE will weaken the already weak US Dollar. The looming Fiscal Cliff and Debt Ceiling are yet additional drivers of downward price action for the dollar. I do not foresee the Fed adding to the already plentiful reasons for the collapse of the US Dollar.
Silver and Gold Prices – You go your way & I’ll go mine:
The Fiscal Cliff issue is NOT A DEBT PROBLEM. In fact it is the opposite – A way to reduce Deficit. Gold Prices have always shot up when Debt has been added (QE 1 to QE3) but why should they rise when Debt is being reduced? Lack of rise in Gold Prices & yet the need for a safe-heaven demand will push market participants to Silver Trading & Investments. Silver has all the safe-haven appeal of Gold in addition to its industrial demand, something that Gold sorely lacks. To top it all, the attractive Silver Prices in ratio to Gold, add more appeal to Silver Investment. Gold and Silver have always been an in-separable pair & Silver and Gold Prices have generally moved in tandem historically. But now, markets would witness a new phenomenon – While on the Upswing. Silver Prices would rise more sharply & quickly whereas Gold Prices may see range bound swings. Gold also has a serious upside resistance at $1800 to $1855 range, capable of turning prices movements back. Gold Prices will need gigantic momentum to break through this range. Gold and Silver though will again behave similarly while on the declines. Silver will Outperform Gold on the upside & also on declines.
Interesting points on Silver: Debt Darkness of 2013 has a SILVER Lining