Gold Prices Take a Breather before the Next Move Up

Last Friday, the price of gold recovered and clawed its way back above $1700 an ounce, despite a stronger dollar and a positive employment report in the US.  Usually, a stronger dollar has an adverse effect on the price of gold. The psychological support level of $1700 an ounce for gold was tested a few times last week as prices dropped to a four-week low on the back of US budget talks and the ever-looming threat of the fiscal cliff.

As soon as the US Labour Department released its latest non-farm payrolls report, traders on Comex tried to push the price of the yellow metal lower. While their strategy worked initially, the price of gold soon rebounded and ended the day above $1700 an ounce.

Gold prices have continued to firm this week, mainly on expectations the Federal Reserve will further stimulate monetary policy when it meets this week. On Monday, spot gold began the trading day at around $1705 an ounce during the Asian session, and then as the day progressed, prices gradually edged higher to hit an intra-day high of $1718 an ounce soon after the Comex opening.  

The US Bureau of Labour Statistics reported on Friday that the U.S. created 146,000 net non-farm payrolls in November, surpassing market expectations for a gain of about 80,000. And, the unemployment rate fell to 7.7% in November, the lowest since December of 2008, from 7.9% in October. However, while the latest figures may appear to be encouraging, if you look deeper, the real picture still remains bleak. The drop in the unemployment rate to 7.7% was down due to a drop in the participation rate of the workforce, which fell to 63.6% from 63.8%. Thus, the unemployment rate is not falling because there are more employed people, but instead because there are less unemployed people claiming benefits.

The US Federal Reserve has already stated that it will continue to buy assets until the outlook for the labour market ‘improves substantially’. Although there were positive signs in Friday’s employment report, the figures still remain far below the Fed’s ‘target’ for unemployment. It is likely that the Fed will replace the expiring twist programme with outright treasury purchases which will be announced at the FOMC meeting this week.

Weak underlying economic growth in the US combined with fiscal cliff fears are likely to prompt the Fed to expand QE3 to make up for the end of Operation Twist, which expires this month. The market is looking for new purchases of approximately $25-45 billion per month. There is a chance that the Fed may choose larger rather than smaller purchases due to the risks facing the economy. And, if the FOMC does agree to boost QE3 this week, gold prices are likely to trade higher and re-test the key resistance at $1,750 an ounce and then $1,795 an ounce.

The political deadlock in Washington continues and things look set to worsen unless a deal between Republicans and Democrats is reached soon. If $600 billion of tax hikes and spending cuts hits the economy early next year then the US is expected to plunge into recession.

Investors are awaiting the outcome of a FOMC meeting which begins today and continues till tomorrow as well as the latest developments regarding the US fiscal cliff.

Last week, as expected the ECB kept rates unchanged at 0.75 and slashed its 2013 growth forecast. In their latest report the ECB projected that growth for the Eurozone economy was likely to shrink next year as it had this year. The ECB maintains that gross domestic product (GDP) next year will contract by -0.9% or grow by a mere 0.3%.

“Economic weakness in the Eurozone is expected to extend into next year,” Draghi said after the central bank’s monthly policy meeting.

“Later in 2013, economic activity should gradually recover as global demand strengthens and our accommodative monetary policy stance and significantly improved financial market confidence work their way through the economy.

“The governing council continues to see downside risk to the economic outlook for the euro area,” he said. “These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area.”

The central bank would continue to supply Eurozone banks with all the liquidity they asked for in the ECB’s refinancing operations at least until July next year, Draghi said.

The BoE also left interest rates unchanged at 0.5% and maintained the size of the asset purchase program at GBP 375 billion.

The RBA announced a rate cut of 25 bps to 3% on Tuesday. Governor Glenn Stevens warned of a strong Australian dollar and stated that the near-term outlook for the non-mining sector would remain ‘relatively subdued’. With regard to the global economy, the RBA cited the Eurozone’s sovereign debt crisis as a major concern.  The central bank also stated that uncertainty over the course of US fiscal policy is also weighing on sentiment at present.

The ratings agency S&P downgraded Greece’s credit rating to selective default, down from CCC, as the bond buy- back program “constitutes the launch of what we consider to be a distressed debt restructuring”.

Eurozone finance ministers agreed that €39.5 billion will be paid to prop up Spain’s banks.

The four nationalised Spanish banks will receive €36.97 billion in European aid. Of this, €17.96 billion – will go to Bankia, which holds 10% of Spanish savings deposits, while €5.43 billion will be disbursed to Novagalicia, €9.08 billion to CatalunyaCaixa and €4.5 billion to Banco de Valencia.

A further €2.5 billion will be paid into Spain’s state-backed “bad bank,” set up to bear losses, estimated at up to €60 billion, following the collapse of the country’s property market.

Over the weekend, Italian prime-minister, Mario Monti, made a surprise decision to resign. Monti’s announcement which rattled financial markets was made after former prime-minister Silvio Berlusconi’s PDL party withdrew its support for his technocrat government.  An election expected in February is likely to be fought over Monti’s reform agenda, which Berlusconi said had condemned Italy to recession and forced him reluctantly to run for a fifth term as prime minister.

European leaders warned that Monti’s policies must continue to prevent a return of the crisis which brought him to power a year ago to avert a Greek-style collapse. 

“Monti was a great prime minister of Italy and I hope that the policies he put in place will continue after the elections,” European Council President Herman Van Rompuy said in Oslo, where he was part of a European Union delegation receiving the Nobel Peace Prize. 

Spanish Economic Minister, Luis de Guindos, warned that instability in Italy could spill over and put Spain’s fragile public finances at risk of further turmoil. 

Only last week Goldman Sachs issued a report on gold in which Jeffrey Currie, the Goldman analyst provided a very bearish outlook for the yellow metal which even suggests the bull market for gold has ended. Frankly, most of these analysts have been completely wrong when it comes to gold, and so, for me this is the contrary indicator I have been waiting for. But, coming from Goldman Sachs, a company that paid a $550 million fine in 2010 for selling mortgage-backed securities that it knew would fail, and then making very profitable bets that these same securities would fail, I most certainly would not take any of their advice. Earlier this year, Goldman paid $22 million for “front-running” — giving its best research and trading ideas to its “preferred” clients first, before making the same information available to everyone else. And, now they say the bull market in gold is over. Beware! They are most certainly up to something. Shenanigans like this have become standard operating procedures for Goldman.

Hopefully, a few more of these larger investment banks will have a similar view to Goldman Sachs which then would give me confirmation that the price is now going higher.

I have no reason whatsoever to waver from my belief that the price of gold is going higher, and thus continue to urge every single individual to own some physical gold. This bull market is far from over. While it is impossible to predict how high the price will be in say three or five years’ time, I am convinced it will be a lot higher than it is now.

TECHNICAL ANALYSIS

Although the price of gold continues to trade below its 50 day MA, prices have found good support at around the $1700 an ounce level. I believe that prices will consolidate for a while and then move upwards once again.

By David Levenstein                                               

About the author
David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

 His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
For more information go to: www.lakeshoretrading.co.za

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.