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Analysts Say Fiscal Cliff is Bullish for Gold

Release Date: 
Saturday, December 1, 2012

SUBJECT:  Week in Review with Joe Battaglia


Analysts Say Fiscal Cliff is Bullish for Gold

December 1, 2012

American Advisor host Joe Battaglia provides a wrap-up of the week's precious metals news along with important commentary every week on the American Advisor Week in Review audio program. Click here to listen.

Gold prices were volatile this week as technical selling competed with safe haven buying. Gold was $8.50 lower for the week, settling at $1,726 per ounce at 2:15 PM Pacific Time at the New York Spot Market close, while silver was $0.87 higher, closing at $34.28 per ounce. Gold ended the month in positive territory, up – from October’s close.

Senate Majority Leader Harry Reid expressed disappointment on Tuesday over slow progress in negotiations to avoid the fiscal cliff, the $600 billion in tax increases and spending cuts that are scheduled to commence in January unless Congress enacts legislation to prevent it. House Speaker John Boehner echoed this pessimistic view on Thursday, stating talks with the White House had made no substantive progress.


Several analysts have noted that the uncertainty over the fiscal cliff is generally positive for gold. "The main underlying factor supporting gold is the fiscal cliff. We're heading into a period of uncertainty over how this matter will be solved, and until it is resolved the fiscal cliff will be supportive," Citi analyst Jon Bergtheil said.

Protracted talks on the fiscal cliff could increase risk aversion and drive purchases of safe haven assets such as gold, but in the short term, hopes for a quick resolution also can support the precious metal, according to Caroline Bain of the Economist Intelligence Unit.  "It could be positive for gold whichever way the negotiations go, but a rally on a speedy resolution might be quite a short-term positive, whereas any risk of prolonged sovereign stress could be a longer-lasting positive." 

“The whole environment around the fiscal cliff is very uncertain,” said Bjarne Schieldrop, the head of commodity research at SEB AB. “The fiscal cliff will be on and off every other day. Most likely it won’t be resolved before the first quarter, but I think that the general direction for gold will be up.”  He cites record levels of gold investment holdings and central bank buying as other factors providing good support for gold.

Deutsche Bank commodity strategists noted potential strength in gold ahead. “We would view the combination of a debt downgrade and the U.S. avoiding the fiscal cliff as gold price bullish,” the bank said. “Indeed, events during August 2011, when U.S. Treasury debt was downgraded, proved to be unambiguously bullish for gold prices.”

Discussion of further fiscal stimulus may drive gold higher.  “I will be assessing the employment and inflation outlook in order to determine whether we should continue Treasury purchases into 2013,” Federal Reserve Bank of New York President William C. Dudley said in a speech on Thursday.  “Talks about more stimulus measures being introduced are bullish for gold,” said Bart Melek, head of commodity strategy at TD Securities.

British bank HSBC believes gold may rise on market expectations of further monetary easing at the December 11 Federal Open Market Committee meeting.  “The Fed cannot continue with ‘Operation Twist’ since holdings of short-term Treasuries will have been exhausted. This means the FOMC could shift directly into another large-scale asset purchase program,” said Kevin Logan, HSBC’s chief U.S. Economist.  Under its current “Operation Twist,” the Fed sells short-term Treasuries while purchasing longer-term ones, helping to keep interest rates low.

“Bullion is historically sensitive to monetary easing expectations. We have noted…that gold tends to react more favorably to Fed announcements of outright asset purchases when compared to maturity extension programs such as ‘Operation Twist.’ As such, an announcement by the Fed of another round of quantitative easing would be a bullish case for gold,” said Jim Steel, HSBC precious metals analyst.

Nick Trevethan, senior commodities strategist at ANZ bank, said “the factors supporting gold really haven’t gone away. You still have large amounts of liquidity in the system, you’re seeing central banks trying to support markets.”

Blackrock Portfolio Manager Catherine Raw offered her outlook for gold prices and investment strategy.  “Really, it’s about currency depreciation as well as inflation and real interest rates,” Ms. Raw said.  “We’ve got the U.S. trying to weaken versus other currencies but at the same time we’ve got the Japanese trying to manipulate the yen and we’ve got the ECB acting to weaken the euro.”

“When you look at what’s happened in the last few months, we’ve seen China cutting interest rates, we’ve seen the U.S. embarking on a third round of quantitative easing, and most importantly, an open-ended nature of quantitative easing that doesn’t care about inflation.  When you actually look at the probability for the gold price on a two to three year basis….the drivers are back in line to really get bullish on the outlook for the gold price over the next twelve to eighteen months.”

Global gold demand in 2013 should be led by strong Chinese demand and a recovery in India, the World Gold Council said.  This may help the precious metal continue its bull run into its 13th year, according to the Council.

Gold importers in India rapidly bought up less expensive stocks of gold with Wednesday’s price drop to near two-week lows, building inventory for the Indian wedding season.  “We’ve seen very good demand after the dip and it’s interesting to see physical demand suddenly pick up,” said Bernard Sin at MKS Finance.

Chintan Karnani, chief analyst at Insignia Consultants in New Delhi, sees support for gold and anticipates opportunistic buying.  “Central bank buying and fear of more central bank buying at lower prices is preventing gold prices from a big fall,” he said. “Laggard short-term investors who were not able to invest in gold at $1,700 are now waiting for a dip in gold prices to invest. All these fundamental factors have kept gold prices firm.”

OCBC Bank analyst Barnabas Gan said the bank has a 2012 year-end gold price forecast of $1,800 per ounce.  

Gold prices could be at $1850 per ounce in the first quarter of next year while silver may average $35 per ounce, Barclays Capital wrote in a research note. 

Thomson Reuters GFMS expects silver may trade up to $36 per ounce before the 2012 year-end and possibly more than $50 per ounce during 2013.

Tom Price, Global Commodity Analyst at UBS, said that he has a price target of $1,900 per ounce for gold in mid-2013.


(Sources:  “PRECIOUS-Gold firms, on track for narrowly positive November,” Reuters, November 30 2012; “Gold futures drop on firmer dollar,” Marketwatch, November 30, 2012; “Gold Swings Between Gains and Declines as Physical Demand Climbs,” Bloomberg, November 30, 2012; “Gold, Silver Rise on Bets Fed Will Expand U.S. Stimulus,” Bloomberg, November 29; “PRECIOUS-Gold rises with stocks on optimism over US fiscal cliff,” Reuters, November 29 2012; “Gold Rebounds on U.S. Budget Optimism, Record Investor Holdings,” Bloomberg, November 29, 2012; “Gold futures rebound after big selloff,” Marketwatch, November 29, 2012; “PRECIOUS-Gold falls with wider markets, fiscal cliff caps losses,” Reuters, November 28 2012; “Gold Futures Drop Sharply at the Open,” Wall Street Journal, November 28, 2012; “Gold Heads for Biggest Loss in Three Weeks on U.S. Economic Data,” Bloomberg, November 28, 2012; “Gold falls as market weighs Greek deal, U.S. data,” Marketwatch, November 27, 2012; “Gold Unchanged After Greek Deal; Firmer Dollar Weighs,” CNBC, November 27 2012; “Gold falls as market weighs Greek deal, U.S. data,” Marketwatch, November 27, 2012; “Is Gold Still a Bullish Bet? Bloomberg, November 26, 2012; “Silver to average $35/Oz in Q1 2013; Gold $1850/Oz,” Commodity Online, November 26, 2012; “Gold Trades Near Five-Week High as EU Ministers Debate Greece,” Bloomberg, November 26, 2012; PRECIOUS-Gold dips from one-month high, focus on Greek debt,” Reuters, November 26, 2012; “PRECIOUS-Gold comes off 1-month high despite firmer euro,” Reuters, November 26, 2012; “PRECIOUS METALS: Gold Rangebound in Asia; Euro-Zone Meeting Eyed,” Wall Street Journal, November 26, 2012; “PRECIOUS METALS: Gold Flat in Asia; Investors Cautious on Greek Debt Impasse,” Wall Street Journal, November 23, 2012; “Gold may be boosted by QE expectations from Dec FOMC Meeting,” Commodity Online, November 23, 2012; “Gold Seen Hitting $1,900 Mid-2013,” CNBC, November 20, 2012)  



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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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