Gold remains on the defensive, weighed by technical damage done a week ago by the massive sell order in Comex futures and follow-through losses below $1700 this week. However, the range established over the last two months remains intact at this point.
The yellow metal set a high at 1795.89 on 05-Oct, it then set a low of 1672.68 on 05-Nov. So here it is the 5th of December and I find myself wondering if today will mark another short-term turning point.
While gold has fallen below its 100-day moving average, physical demand has been brisk below $1700. It is in fact common to see physical buyers step in and buy when selling in the paper market drives the price lower. As evidence of this strong physical demand, the U.S. Mint reported that gold coins demand was up 131.4% m/m from October, and 232.9% versus last November.
DIP AHEAD OF CLIFF?
Many clients have called in over the past week with the urge to buy gold, yet curious as to why they’re getting such an opportunity in light of the impending fiscal cliff. They view gold as a safe-haven and sense that the uncertainty associated with the cliff, and the likelihood of recession if we go over the cliff, should be a positive for gold. It has in fact been the most common question since the post election rally fizzled at 1754.31 on 23-Nov.
PHYSICAL GOLD IS THE SAFE HAVEN
Gold is absolutely still a safe haven in its physical form. This is where the true safe-haven and wealth preservation minded gold buyers concentrate their efforts. However, price discovery occurs in the paper market, the realm of speculators. Consequently, the initial reaction in gold is often like that of a risk asset.
COMMODITY ASPECT
There are also many that still view gold as a commodity. In light of the stalled fiscal cliff/debt ceiling talks, it would absolutely make sense to sell commodities. Pretty much everyone agrees that a drop over the cliff would push us back into recession, negatively impacting demand for commodities.
Just about every commodity fund for example has a gold component; so in lightening-up or eliminating commodity exposure in the face of mounting growth risks, one is usually selling gold as well. And that’s true, even if you see gold more as a store of wealth or money, rather than a commodity.
Whether some kick of the can compromise is reached before the end of the year, or whether we go over the cliff, the one question that the gold market is waiting for an answer on is, ‘what’s the Fed going to do about it?’ Almost assuredly, the Fed will pile on additional accommodations at the first hint of another recession. Yet even with some deal, the U.S. economy remains on very unstable footing.
BOTTOM LINE
It remains likely that the Fed will expand the scope of QE3, whatever the outcome of the fiscal cliff/debt ceiling debate. Additionally, the U.S. is going to continue to go deeper into debt whatever the outcome; for what is truly being debated is how fast we’ll be digging. Ultimately, this will continue to provide significant underpinning for the gold market.
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