Precious Metals Weekly – Bouncing higher

by: Georgette Boele

131017-Precious-Metals-weekly.pdf ()
  • Gold prices were not supported by the fiscal impasse…
  • …but bounced higher afterwards…
  • … driven by a lower US dollar, market psychology and tighter conditions

Why did gold prices not profit from the US fiscal impasse?

For some time now, gold has failed to live up to its safe-haven appeal. Therefore, it failed to profit from the US political uncertainty, while the US dollar was under pressure. There are three main reasons for this: investors continued to liquidate positions and this weighed heavily on gold prices; some investors probably still remember that gold prices moved lower instead of higher during the liquidity crisis in 2008; and, finally, expectations about strong demand from India have been adjusted downwards.


Why did gold prices rally after a deal was struck?

The most important reason for the bounce higher in gold prices after a deal was struck are as follows: We believe that there remains some scepticism in gold and currency markets. Indeed, the focus will now most likely shift to the damage of the shutdown and whether this will be large enough to prompt the Fed to further delay its tapering decision. While we think that a December taper remains the most likely outcome, it is clear that the risks of a March move have risen significantly. Last, but not least, the deal merely kicks the can further down the road, and the next fiscal battle already looms on the horizon. The prospect of a weaker-than-expected US economy and a delay of tapering by the Fed has hurt the US dollar and has supported gold prices. Gold prices bounced above USD 1,310 per ounce as a result.

Psychology also played a role though…

The market has tried several times to push gold prices downwards towards USD 1,250 per ounce. It has been unsuccessful in doing so. When the US deal was announced, the US dollar failed to rally, and gold prices held up pretty well. Gold prices holding at this point was a signal that the market had lost its patience. Now, the market has started to test if prices are able to go higher from here. So far the market has booked a small success. What will be more interesting is if the market is able to take out resistance that is layered at USD 1,352 per ounce. If the market fails to take this level out, prices could quickly fall towards USD 1,180 per ounce. A lot will depend, however, on the direction of the US dollar.

…and reports of tight market conditions in India also helped

India is preparing for Diwali, the Festival of Lights. The date of Diwali depends on the cycle of the moon. This year it occurs on 3 November. The festival runs for five days and the main celebrations happen on the third day. Usually, consumers buy a lot of gold for the Diwali festival and for the wedding season that will continue until December. In India, there have been reports of a rise in the premiums that customers are willing to pay for physical gold on top of the gold market price. This could be a signal of a shortage in the market. The very short end of the gold forward curve signals this shortage as well. This development has supported gold prices.