Morning Market Update Dec 4

December 4th, 2012 by

Gold saw a sudden sell-off in Asian trading overnight, dropping $12 an ounce in one minute. This set the stage for a greater than usual drop on the COMEX opening, as spot gold dropped through the $1,700/oz floor to hit a four-week low, despite a continuing weakening in the dollar. Commodities across the board fell as well, as Wall St. is becoming leery of economic slowdown or recession over a possible failure in fiscal cliff negotiation. Gold is being viewed as a “risk on” asset instead of a “risk off” asset at present, which is why it is tracking other commodities.

As gold dropped through the $1,710 then $1,705 marks, stop-loss trades were triggered, adding further downward pressure. A weak dollar usually supports gold prices, and the dollar is at a six-week low versus the surging euro as well as against most other commodities again today.  Some have pointed out that the markets are in a state of low liquidity right now, which may have contributed to the sell-off of gold.

Most analysts see the price drop in gold as “unsustainable,” to use the words of Commerzbank, due to the underlying conditions of  the global economy. Analysts expect central banks, especially the Chinese, to buy heavily into the dip, as well as institutions. Demand for gold ETFs continues to rise, despite the choppy gold market right now.

Continued quantitative easing in the U.S., Europe, and Japan are having reduced effect the longer they go on, while at the same time pumping billions of paper money into the system. Add to this the just-announced Spanish bailout and the fact the the European Stability Mechanism (which would handle the bailout) was just downgraded by Moodys, and there seems no logical way to avoid currency devaluation.

U.S. auto sales were the best since February 2008 as people replace worn-out cars and vehicles water-logged by Hurricane Sandy. This should boost platinum and palladium prices going forward. Warren Buffett’s chief investment officer at Berkshire Hathaway sub-unit General Re-New England Asset Management stated that he believes businesses cutting back and the failure of quantitative easing going forward will support a rise in gold prices.

by David Peterson