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October 12, 2012

Gold Long Term Turns Unstable

Gold Prices have failed to surpass the psychological $1800 level but seem to be able to gather large & quick speculator support at all declines, small or large. I maintain that the near term target for Gold Futures remains at $1855, but as also repeatedly brought to notice several times, any further upside in Gold Prices above $1855 will need extraordinary circumstantial strength like the US Fiscal Cliff coming into effect or China takes measures to hedge its Huge US Dollar Forex reserves. Until then, I do not see a reason to further appreciation to Gold Prices. 
In addition, the recent huge increases in Gold ETF participation & a substantial lack of Physical demand is a point of worry. Holdings in gold-backed exchange-traded products were little changed at a record 2,583 metric tons yesterday, data compiled by Bloomberg show. There seem to be a large & growing chunk of speculators & short term traders but an alarmingly large fall in retail investors – the fundamental support for a rally. If all traders & investors are in Buy side & also own a large chunk, who would be selling, apart from the miners? Moreover how many would then be left to buy more Gold & continue the rally?
Monetary Base is contracting in size from a year ago. Charts clearly indicate the Monetary Base is contracting and said it’s happening for a simple reason that the US Government securities the Fed has bought are maturing, which will not be renewed. The “Fiscal Cliff” refers to the potential for spending cuts and tax increases in 2013, unless Congress acts to change fiscal policy. Economists have forecast that if the fiscal cliff occurs, it could push the U.S. into a recession. I am sure the Congress will work out a fiscal policy to avoid it from happening after the elections. In that case, Silver & other Base Metals would outperform Gold till further negativeness sets in. For more read: Global Forecast 2012, where I have mentioned, 2013 is when the real pain Begins…

Gold yet remains Bullish for the near term:

Gold is a natural hedge against sure shot future Inflation in an era of ultra-loose monetary policy. Comex Gold and Silver declined after a US economic data report showed a sharp decline in weekly U.S. jobless claims & late Wednesday news that the Standard & Poor’s ratings agency downgraded Spain’s credit rating to near junk status. The Euro currency sold off and the US dollar index rallied in the immediate aftermath of that news. The S & P move was a bit surprising to the market place, but not really a significant shocker to change the overall perception of Spain’s financial condition or the overall EU debt crisis. This in fact bolsters ideas that Spain will seek further bailout funds from the EU sooner rather than later. 
Labor Department figures showed initial applications for U.S. jobless benefits fell 30,000 to total 339,000 in the week ended Oct. 6, the fewest in more than four years. Reports also indicate that Indian demand for gold exchange traded funds – Gold ETF’s was at a record high in September, despite weak retail sales of gold jewelry. 
Some heightened Middle East tensions supported Crude Oil, and did offset a bearish U.S. weekly DOE storage report. The open-ended nature of the QE3 promises Higher Inflation & that in turn promises for higher Gold Prices. With a lot of political manipulations coming into play now, a fresh rally in Gold seems to occur only closer to or post the U.S. elections now. 
Any news of fresh Bailout packages for Greece or Spain may trigger some movements, though even that seems possible only close to the month end or by early November. Any decline in Gold may be erratic and uneven as it is more susceptible to easing policies and less vulnerable to slowing growth concerns compared to other commodity movements. Gold will also garner huge support on all declines as Inflation seems absolutely unavoidable on the back of a limitless QE3. Inflation rise is now only a matter of time & Gold the only natural hedge. 
The central bank Gold purchases are expected to continue, especially by emerging market central banks who are looking to diversify their foreign exchange holdings. Rating agency Standard & Poor’s downgraded Spain’s credit rating by two levels, and now the country’s rating is only one notch above junk level. There is a greater chance that Spain will ask for financial aid and of the ECB having to make good on its promise to buy Spanish government bonds. This will push the Euro up & in turn trigger a rally in Gold prices.

Mixed Trends for Copper & Base Metals:

Copper traders are the most bearish in four months on mounting concern that demand for Base Metals will weaken as growth slows from China to Europe. China’s construction and housing boom that started in 2009 is in its later stages and there are “significant downside risks” to copper prices in late 2013 and in 2014, Goldman said, citing a slowdown in construction completions and rising mine supply. A 164,000-ton supply surplus this quarter will reduce the annual shortage to 51,000 tons, according to Barclays. 
The surge in copper demand from China’s housing market probably will “crash” by 2014 as projects are completed, Goldman Sachs Group Inc. said in a report Oct. 10. But now there are signs the economy is improving in the U.S. The jobless rate unexpectedly fell to 7.8% in September from 8.1% the prior month, the Labor Department said Oct. 5. 
American service industries expanded by the most in six months. North America accounts for 11% of copper consumption. China inventories of Copper showed a sharp jump for the week ending 12 October 2012. This was much more on the expected lines as China is trying hard to increase its local currency versus the Dollar in an attempt to ease inflation in commodities and sourcing it at a cheaper rate. Yuan already showed strength against the US Dollar on Friday when it strengthened 127 basis points to 6.3264 against the later. 
Shanghai weekly inventory of Copper increased by 18967 metric tonnes or 11.7% to 181514 metric tonnes on 12 October 2012. Mixed views in the markets are working at the moment. Some participants believe that the rise in the stockpiles is a result of restocking of the metal after China National Holidays. In other major news, short range outlook of Steel for 2012 and 2013 was released by World Steel Association. The organization has forecasted that the global apparent steel usage will increase by 2.1% in 2012, significantly lower from 6.2% growth in 2011. The demand is expected to grow by 3.2% in 2013. The apparent steel use in EU 27 is expected to decline by -5.6% in 2012. In particular, apparent steel use in Spain and Italy in 2012 is expected to fall by -11.9% and -12.6%, respectively. 
Courtesy CommodityTradeMantra.com - Comprehensive market intelligence (EconMatters author archive here

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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