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January 8, 2013

Gold and Silver Bulls Getting A Serious Wake-up Call

Comex Gold Prices plummeted as US Federal Reserve policy makers said that they’ll probably end asset purchases this year and investors cut holdings by the most since May. Silver Prices tumbled to their lowest since August as the Market Bulls got spooked by the Unexpected News. 
US Federal Reserve policy makers said that they will probably end their $85 billion monthly bond purchases sometime in 2013, with members divided between a mid- or end-of- year finish, according to the record of the FOMC – Federal Open Market Committee’s Dec. 11-12 gathering released last week. Some FOMC members actually believe that QE – Quantitative Easing of US monetary policy should be wound down during 2013.
Several Fed officials thought that the central bank would be able to either slow or stop the purchases well before December. A few members said that the plan would likely be needed until about the end of the year. Almost all Fed members thought that the $40 billion per-month program to buy mortgage debt started in September was working, but there was also uncertainty about whether the benefits would last and that the potential costs could rise as the size of the Fed’s balance sheet increased. 
Gold Prices have benefited the most from the ultra loose monetary policy of leading central banks because of Gold’s appeal as a hedge against inflationary fears, which is generally seen after massive money printing. The last 4 years of continuous & massive monetary infusion by the US Fed via its so-called various QE programs, which is negative for the US Dollar, have provided a strong platform for Gold Prices.

Issues & Triggers affecting Gold & other Metals:

Friday’s jobs report, the Non-farm payrolls data is likely to have a bigger impact on the markets & most trades may recover from the sharp declines seen yesterday. The ominous Debt Ceiling debate and the fiscal drag stemming from higher payroll taxes and higher income taxes will mean lowered Investment capacity, which in turn will mean lesser investment ending up in Gold and Silver. 
Crude Oil Prices have not shown any major weakness yet, which is also a strong indicator of the looming Inflation Break-out – a major side effect disaster caused by these repeat QE programs. Copper, Lead & other Base Metals declined after a sharp rally yesterday, but are yet strongly poised for much further rises. No long term weakness or chart damage seems visible in the Base Metals complex yet & are well placed in the Bullish mode. 
The Fiscal Cliff agreement limited tax hikes for most Americans, but the future of any spending cuts and debt limits must still be determined, which could mean another stand-off that curtails some of the recent euphoria. But odds are good that the longer-term outlook will improve further by March, which will be supportive for industrial Precious Metals – Silver, Base Metals and Crude Oil. – Good bye Gold for some time. 
Also bearish for the longer term is the fact that, Gold Demand from India, the world’s largest consumer of Gold, will dampen once the Government implements measures to curb Gold imports. Till then Gold Demand in India may get some boost as stockists accelerate buying & try to benefit from the current tax slabs before they are hiked, which could induce gold imports to decline by 20% to 25% in 2013. The RBI – Reserve Bank of India is reportedly considering volume and value restrictions on imports by banks and agencies, while the government is considering higher duties.

Gold Supply to Rise while Demand falls:

Gold Mine supply is expected to rise in 2013 as analysts see new projects coming online to add to production totals of 2012. Some of the large scale projects that will start up this year are Rio Tinto’s (NYSE: RIO) Oyu Tolgoi mine in Mongolia and Detour Gold Corp.’s (TSX: DGC) Detour Lake project in Ontario, that will push gold-mine output higher. 
The CPM Group said that the Pueblo Viejo mine, a joint-venture between Canadian mining giants Barrick Gold Corp. (TSX, NYSE: ABX) and Goldcorp Inc. (TSX: G)(NYSE: GG) in the Dominican Republic, came online mid-2012 and will have its first full year of production in 2013 with roughly 1 million ounces of annual production expected. Barrick’s Pascua Lama project, located on the border of Chile and Argentina, saw production pushed to 2014 and was hit with huge cash costs and environmental throughout its construction. 
The mine will produce an average of 800,000 to 850,000 ounces of gold when it does finally come online. Canada is also getting some attention as large projects are beginning production &Latin America will become a greater power in the gold mining community. Detour Gold’s Detour Lake Project will produce an average of 657,000 ounces of gold annually when it begins production this month.

Gold Weakness Alerted before time:

Also, if the US Economy picks up in 2013 (Bouts of Illusion), the Fed could slow down its bond purchases, but I don’t think they will end them anytime soon. The US Federal funds rate, its main policy rate tool, remains at the exceptionally low level of zero to 0.25% and there are no expectations that will shift in 2013. If the US Economy starts slowing down due to the new Fiscal Cliff implications or the new Tax Hikes or if unemployment starts rising, the US Federal Reserve will now have to think hard before adding new QE or printing more money as that would then increase deficit & increase taxes. 
This in itself will take away the biggest supporter of Gold Prices from the markets as the US will no longer be able to afford new QE or fresh infusion of money. The US Federal Reserve surprised markets at the last meeting for 2012 in mid-December meeting with a change in its communication policy. Instead of a calendar date, the Fed shifted the forward guidance to the conditions needed to keep the federal funds rate at the current exceptionally low levels. The Fed initiated thresholds for unemployment and Inflation expectations.
Gold and Silver has always been an in-separable pair & Silver and Gold Prices have generally moved in tandem historically. But now, markets would witness a new phenomenon – While on the Upswing. Silver Prices would rise more sharply & quickly whereas Gold Prices may see range bound swings. Gold also has a serious upside resistance at $1800 to $1855 range, capable of turning prices movements back. Gold Prices will need gigantic momentum to break through this range. Gold and Silver though will again behave similarly while on the declines. Silver will Outperform Gold on the upside & also on declines.
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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