Gold fell 1% in New York trading today, and silver fell 3%, as political bickering by Pelosi and Boehner outweighed positive economic data, sending the stock market lower. Traders have been treating precious metals as a risk-on raw commodity rather than a safe haven, causing them to follow the Dow downwards as the market took on a risk-off stance.
The dollar gained slightly today while oil faded a bit, both helping tamp down enthusiasm after last night’s “China Bomb” tripped sell stops during light trading in Asia, and gave gold a $24 drubbing. Buyers in India, buoyed by a resurgent rupee and the chance to rebuild holiday-depleted stocks at discount, jumped in at the dip in Asia, but could not buy enough to counteract the dumping by the computers. Standard Bank confirms the the surge in Asian physical purchases, and notes that the drop in prices are most likely from funds taking profits ahead of an uncertain tax landscape in the new year due to the fiscal cliff. Standard Bank reiterated its advice to buy into dips when gold drops below $1,700/oz, as it believes the fundamentals for gold are still bullish.
In U.S. trading, funds holding long-term positions in gold have begun to consolidate, as they think over the implications of the Fed’s “Evans Rule.” Massive quantitative easing that was guaranteed by Bernanke to continue into mid-2015 may end sooner if the new unemployment threshold of 6.5% is reached. This is a new wrinkle for futures traders, compounding the fears today that perhaps a budget deal by December 31st isn’t a done deal. Both the U.S. Treasury Department and the Federal Reserve have warned that they have fewer tools/tricks available to them this time than they did in 2011 to prevent a government default, if politicians do not raise the debt limit before the deadline. Another downgrade of U.S. debt will mean billions more in interest payments and debt service, digging an already deep deficit deeper, and increasing the temptation to devalue the dollar.