Commodity Trade Mantra

US Fiscal Cliff Issue Triggers Gold Market Nervousness

Gold Market Nervousness

US Fiscal Cliff Issue Triggers Gold Market Nervousness

Gold Prices slipped lower mysteriously yesterday, despite repeat declines in US Dollar Index. Gold Futures Prices slumped to a 4 week low yesterday amid heavy & mysterious selling, closing under $1,700 an ounce, as a stalemate in US Budget talks drove commodities down. It was most surprising that heavy selling hit Gold and Silver markets at a time when trade was very light & with US Markets yet to open for the day. Most importantly, the selling in Gold and Silver occurred in the Asian time zone where liquidity is typically far from robust; it also happened around lunch time when many traders were off their desks. The US Dollar index was lower again Tuesday and hit a fresh six-week low. Gold Prices & the US Dollar, which usually move in opposite directions, seem to be moving in tandem on pessimistic ideas of deep depression as an after effect of the Fiscal Cliff & that no additional stimulation will be provided by the US Federal Reserve. The market’s perceived nervousness on complications over Republican and Democratic negotiations are certain to spur additional & heavier volatility. Gold Prices dipped sharply; though the Euro currency hit a fresh six-month high against the US Dollar and European stocks gained amid ideas the European Union sovereign debt crisis has at least stabilized at present. No substantive progress occurred on the Fiscal Cliff issue yesterday, with President Obama rejecting a plan from House Republicans. Both sides have now presented their respective wish lists, neither of which is deemed realistic or acceptable to the other. The Democrats and Republicans have less than four weeks left before more than $600 billion in tax increases and federal spending cuts are triggered. Gold Market traders fear that if the so-called Fiscal Cliff isn’t averted, the US may face a recession. Gold is being sold along with just about everything else in commodities with the worries on the Fiscal Cliff. Comex Gold Futures for February delivery dropped 1.5% & closed at $1,695.80 after the price touched $1,692.60, the lowest for a most- active contract since Nov 6. Gold Prices are again above the psychological $1700 level today in early Asian Trade. Comex Silver too declined to $32.75 & closed nearby at $32.81. There can be more turbulence as investors react to news driven reports emanating from the gridlock in Washington. We may be on the verge of another major breakout as the Precious Metals market may be once again pricing in the next move, as done before the QE3 announcement. Any progress with the fiscal cliff plus an announcement of QE4 in 2013, where the Fed may expand its balance sheet to purchase long term treasuries could spark a hyper inflationary rally.

Trading in Copper has been smooth, thanks to the recent China PMI data, but Crude Oil movements have been choppy for almost a week now. Base Metals have been the lone bright spot, at least moving higher over the last few weeks just as other complexes have floundered. Most markets seem to be caught in a prolonged state of Paralysis, incapable of mounting a sustained Push, in either Direction as they wait to see if the US Fiscal Cliff issue is resolved. Copper moved higher yesterday to a six-week high but gradually rolled back, with the Base Metals group ultimately finishing mixed. A serious economic or geopolitical surprise could soon jolt the currently choppy & swinging market place in the coming weeks till the year end.

QE4 or QE3 – Reloaded to Debase $85 Billion per Month

The US Federal Reserve, led by Ben Bernanke, initiated three substantial rounds of what it calls Quantitative Easing – the QE. Based on the QE, the Fed buys government bonds and other assets from secondary markets with newly created Dollars to bring the US Economy back on the growth trajectory. Just to give you an idea of how enormous amounts of money have been printed so far & how much debt the consecutive rounds of QE have so far created.

  • QE1 (Nov 2008 – Mar 2010): $1.65 trillion
  • QE2 (Nov 2010 – Jun 2011): $600 billion
  • QE3 (Sep 2012 – Eternity): $40 billion per month.

Moreover, QE3 is an Open Ended program, which means that there is no limit on the amount of money the Fed can create and inflate the debt with within QE3.

Inevitable Trajectory toward Currency Debasement:

The purchases in the amount of $40 billion per month will continue as long as the Fed deems necessary. The Administration proposes as part of a Fiscal Cliff compromise that the Debt Ceiling be permanently removed. That means Debt to infinity. That will result in a tremendous rush into tangible assets such as Gold and Silver, driving their prices to bubble-like proportions. The Fiscal Cliff has stirred a great deal of debate among legislators, as analysts estimate that going over the cliff would plunge an already weak US economy into recession. As ongoing Fiscal Cliff negotiations in Washington continue to storm the headlines, Gold and Silver have experienced volatility which is likely to continue in the near term. Yet, despite the high level of political contention, an actual resolution couldn’t be further, as whatever outcome results from the cliff is certain to extend the problem rather than resolve it. Tax hikes, government spending, and debt ceiling increases will create a greater problem in the future. Can a crisis caused by excessive spending and lax credit creation be solved by the same measures which produced it?  The thought alone is absurd. The FED’s most recent commitment to print an unlimited amount of currency was a ‘point of no return’ in its journey toward complete debasement. When a nation debases its currency supply, all that currency will once again come chasing into that same tiny pile of metals, and Gold and Silver will revalue themselves higher measured in those currencies.

Obama Firm on Tax Rates:

President Barack Obama is hardening his stance on his first post-election confrontation with Republicans, declaring he will make no deal on the country’s fiscal future unless congressional leaders first accept tax rate increases on top earners. During an appearance yesterday on Bloomberg Television, Obama’s first media interview since his re-election, the president paired his ultimatum on taxes with signals he is ready to make concessions to Republican House Speaker John Boehner’s calls for cuts to entitlement programs such as Medicare health insurance for the elderly. His demands on taxes and a public relations offensive to engage voters are a shift from Obama’s approach to the budget battles of the last two years, reflecting greater political leverage after his re-election and lessons the administration has drawn from past negotiations. “We have the potential of getting a deal done,” Obama said in the Bloomberg interview. “We’re going to have to see the rates on the top 2% go up, and we’re not going to be able to get a deal without it.” He suggested further negotiating sessions with Boehner wouldn’t be productive without a Republican “acknowledgment” that tax rates on high earners will rise. Obama is seeking to raise income tax rates on individuals earning $200,000 or more a year and married couples earning $250,000 and more annually, while Republicans say any increase in tax revenues can only come from limiting deductions and other breaks. Obama said the Republican approach can’t raise enough money without adding to the tax burden of middle-class families. “It’s not me being stubborn; it’s not me being partisan,” Obama said. “It’s just a matter of math.”

Substantial movements in Gold likely after FOMC meet:

Gold Prices will start another epic run the day the Federal Reserve will announce a QE4 or extend scope of the QE3 at its Federal Open Market Committee – FOMC meeting. Decisions made at the Dec. 12 FOMC meeting could add as much as $2.2 trillion to the Fed’s balance sheet over the next two years, which will turbo charge Gold and Silver Prices and Crude Oil prices as well. The Federal Reserve will dramatically hike up the monthly purchases of $40 billion in Mortgage Backed Securities – MBS by at least double the amount, at the Dec FOMC meeting is almost a given as it practically has no other choice. By way of Operation Twist program, expiring Dec 31 this year, the Fed sells about $45 billion of short-term Treasuries each month and uses the proceeds to buy long-term Treasuries. The Fed committed in October to extending its easing policies as long as necessary to bring down unemployment and aid the US Economy. Its only option is to convert Operation Twist to a conventional bond-buying program – effectively doubling its QE3 money-printing. “Our baseline expectation is a continuation of the current pace of asset purchases of $85 billion per month on an open-ended basis, which would imply that the current $45 billion per month in Operation Twist-financed Treasury purchases is replaced by $45 billion per month in QE-financed Treasury purchases,” Jan Hatzius of Goldman Sachs said of the likely actions at the Dec FOMC meeting.

Simple Logic- You borrow, You have to pay back:

If governments borrow too much and can’t pay it back, the nation will have to go bankrupt. The more debt it has, the worse its reputation is. People are less willing to put their money into treasury bills of a government with excessive debt. If the economy is shaky and the government is printing money, it damages its reputation but also makes the currency worth less and less. Hyperinflation is not a default nor bankruptcy in technical terms, but it is so in practical terms. For the USD bond holders it will make little difference if they are not paid or paid something that is worthless. In such an environment investors need to look out for safe havens or hedging options. Gold and Silver have been used as currencies throughout the centuries. And people, for whatever reason, perceive them as valuable, particularly in times of economic turbulence. This alone stipulates that Gold and Silver prices may rise along with the worsening of the economic situation. And in case of the unlikely collapse of paper currencies, Gold and Silver could quite naturally come in as the base of a new monetary system. Gold is generally the most sought after option. But with Gold prices rising consecutively for the 12th year in a row & Inflation also hitting at the same time, Gold seems rather out of reach of the small or medium size investors. That in turn makes a huge way for Silver to replace Gold. In case of a default by the US on its obligations and the demise of the dollar, a new currency system based on the Gold Standard is introduced.

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