Afternoon Market Update Dec 19

December 19th, 2012 by

Gold and silver ignored positive news today as traders stayed on the sidelines for the most part. The dollar hit a new 3-month low today while oil hit a new 3-week high, both events usually positive for precious metals.  Data from CME Group shows that fresh short positions were taken Tuesday after Monday’s dramatic drop in gold.

New building permits in the U.S. hit a 4-year high, signalling growth in new homes in the first part of 2013. Home builders are starting to hire again, which is good news for building materials and appliance companies. It remains to be seen how this uptick in new home construction will affect unemployment, as more people, especially in the construction trades, may be encouraged to re-enter the workforce and increase the numbers of people actively seeking jobs.

Stocks started the day higher, but were depressed along with precious metals on the “blame game” being played out in Washington over the fiscal cliff. This drama has served to stifle commercial and industrial expansion since November as companies wait to see what the new tax landscape will look like in the new year.

In Europe, business confidence in Germany rose for the second consecutive month after dropping to a 2.5-year low in October. Stabilization of the Greek crisis and the recent upgrade of Greek government debt by Standard & Poors probably paid a role in the improved outlook.

In Asia, the World Bank has raised its estimate of Chinese GDP growth from 8.1% to 8.4%. Far from the halcyon days of robust double-digit growth, but most other nations would probably die for the chance to have 8% growth next year. The 2013 outlook for other East Asian nations has improved slightly as well, as Indonesia, Malaysia and the Philippines are expected to see growth over 5%.  The continuing strength in the rupee has helped gold imports for India, despite punitive tariffs levied by the government in an attempt to curb the purchases.

The outlook for gold and silver is up in the air, as even veteran analysts are at a loss to explain the recent behavior. Even more so than stocks, precious metals will need to wait until the new year for signs as to which way the economy is heading.  What hasn’t changed is the $85 billion a month of new money that the Fed is pumping into the economy.

Grant Williams of Vulpe Investment Management noted the other day that it takes the Fed less than four months to buy bonds worth more than the entire $315 billion of gold reserves held in the vaults at the Bank of England on behalf of several nations. This does not take into account the same behavior in Japan and Europe. Avoiding inflation under these circumstances is impossible in the long term.

by David Peterson