Afternoon Market Update December 7

December 7th, 2012 by

Gold and silver both recovered from their early morning hit, as U.S. consumer confidence was reported lower than expected, hitting a 4-month low. This is attributed to the public wondering how big their tax hit is going to be after the “fiscal cliff” deficit negotiations in Washington. The dollar took a hit after European stocks rallied to an 18-month high, which helped gold stay above $1,700/oz since 9:30AM. Silver has had a choppier recovery, but has stayed mostly above $33/oz.

In the last four years, December has been a down month for precious metals, with gold seeing a drop of an average of 8% for the month since 2008. However, each year has seen a January rebound. This behavior will be magnified this year by the fiscal cliff negotiations.

Looking forward, Morgan Stanley notes the possibility of a small rally this month if gold stays above $1,680/oz as speculators move to cover their shorts. They have revised their 2013 forecast for gold, predicting an average of of $1,853 an ounce.  Standard Bank says that people should be buying gold at $1,700 an ounce, not selling it. They take note of the closing spread between platinum and gold, now near $100. They say that platinum may go to $1,650 next year, and trade close to $2,000/oz by 2015 as demand outstrips production.

Closer to today, questions are starting to arise about how necessary “QE4” and “Endless Twist” are, with unemployment now below 8%. It’s assumed that new quantitative easing will be announced next week by the FOMC, but the signs that the U.S. economy may already be recovering has more people thinking of the increased possibility of inflation. UBS in their recent analysis says that gold has not “priced in” the effects of further open-ended quantitative easing.

Several analysts are concerned about what would happen if Obama got the ability to eliminate the debt ceiling. There’s a concern that without a hard debt ceiling (even though the U.S. regularly raises it,) the dollar would lose the confidence of the world market, and with it, its status as a reserve currency.  This could spark hyperinflation, and the escalation of the price of imports (oil) be disastrous for the U.S. economy.

by David Peterson