Morning Market Update: Dec 14

December 14th, 2012 by

Gold and silver are trading in a narrow range today, continuing the behavior from overnight trading.  Precious metals and currencies are mimicking the stock markets in Europe and the U.S., as there is no major economic news to drive the markets. It’s a different story in China, as good economic news gave the Shanghai exchange a big boost. Expectations of increased auto sales not only in China, but in the U.S., has helped palladium prices (used in catalytic converters.)

Deutche Bank attributes the decline in gold partially to the fact that QE4 was already priced into the market before the announcement, but the sudden drop in unemployment (even though it was mostly from people giving up, not finding jobs) spooked the market with the possibility of an early end to the money printing that was expected to extend at least two and a half years. Another weight on gold is the increased possibility of politicians pushing the U.S. into a recession in two weeks by failing to come to a compromise over debt ceiling and fiscal cliff negotiations. A fiscal cliff- induced recession would “would result in a further decline in money velocity within the country and therefore an offset to the growth in money supply implicit in the Fed’s QE announcement,” according to the bank.

Analysts believe that many speculators used the FOMC bounce yesterday to liquidate some gold futures, on top of the usual year-end squaring away of accounts that depresses gold prices in December. Commerzbank agrees that it is paper gold that is driving the fall in prices, rather than physical gold:

“Despite buoyant demand for gold coins and gold ETFs – ETF holdings have once again hit a record high of 2,630 tons of gold – gold continues to trade at below $1,700 per troy ounce. We believe lower demand on the part of short-term investors is to blame for the current price weakness. Their risk appetite is likely to have grown in view of the better economic data, meaning they are avoiding gold as a safe haven.”

China is expected to buy into the dip, as well as India (despite the Indian government raising taxes on gold in an attempt to staunch their current accounts deficit,) but even the largest two physical gold buyers on the planet won’t outweigh a large short-term paper dump. Once the new year starts and the political budget games in the U.S. end, market fundamentals should return.

by David Peterson