Gold Traders Cautiously Optimistic; Excess Factor Skews Markets

The complexities of this event have lead to the sharp declines last week and the currently seen directionless and small movements in the otherwise more aggressive Precious Metals Group. Gold and Silver generally perform well in adversities but the double whammy nature of the currently faced complex Financial problem seems to keep longer term Gold Futures traders on the sidelines.

Whatever be the issues, till date, traders have had biased views and have taken positions accordingly. But this time, gold market players are playing the wait and watch game, waiting clear signals for fresh entry in either side of the trade. There have been reductions open positions on both sides of the futures trade.

Gold and Silver investors remain reluctant to invest because of the uncertainty surrounding potential automatic tax rises and benefit cuts if the U.S. Congress doesn’t agree to a new fiscal program. With minimal economic data to be released in the final weeks of the year, the markets will be particularly sensitive to outcomes from the budget negotiations. The only good news about this is the emergence of better physical demand in gold around $1685 and Silver around $32, some very crucial support levels in both as expected.

Most of the Gold and Silver market investors and traders have largely been disappointed on their expectations of large upsides after the announcement of the QE extension by the Fed in the FOMC meet last week. But these expectations by the Gold Bulls were wrongly timed and I had warned about the same, a day before the results of this meet were to be announced.

There was no concrete reason for Gold and Silver to start upside movements based on the QE extension. The Gold Market is full of expectations of Gold prices rising above $2000 in Q1 next year. I am yet doubtful about the same. I have repeatedly voiced this doubt of Gold facing a stiff resistance at $ 1855. Gold prices have dipped thrice from a rise to $1800 and there will be a huge pile of Buy stops beyond this crucial technical resistance.

A rise in Gold Futures above $1800 will trigger huge long positions and traders may get disappointed again. I would prefer buy at dips now but remain on side lines then and await a breakout above $1855 for fresh positioning. All said and done, I would place stronger and larger bets on Silver, rather than Gold.

Gold Market movements Range Bound on Fiscal Cliff outcome:
Concern about a speedy resolution to the US Fiscal Cliff seems to be growing, which suggests that the Gold Market may have started to price in the low-growth consequences of the imposition of higher taxes in the US. This would result in a further decline in money velocity within the country and therefore an offset to the growth in money supply implicit in the Fed’s QE announcement.

The Gold Market could remain under some pressure until the Fiscal Cliff problems is resolved one way or another. Base Metals retain positive undertones based on the recent spate of positive economic reports from China. Figures from the World Gold Council indicate that Chinese Gold Demand dropped to 176.8 tons in Q3 2012, a fair decrease from Q3 2011’s 191.2 tons.

Jewelry Demand fell by 6% and Investment Demand by 12% – largely in response to perceived slowdowns in the Chinese economy. In other news, Shinzo Abe’s Liberal Democratic Party won an outright majority in the lower House and with the New Komeito party, and the new coalition government will have a two-thirds majority which should allow the government to enact new legislation with little resistance.

The markets expect Japanese monetary policy to remain largely similar with the BOJ, led by Governor Masaaki Shirakawa, to continue its interpretation of "powerful easing" with incremental increases to the asset purchase program with the aim of achieving the 1% inflation target. With this positive note coming from Japan, with possible stimulus, is keeping short sellers in Gold on a short leash as well.

Additional QE support from the FOMC last week, eurozone’s formal approval of an aid disbursement for Greece, the possibility of the US falling off the Fiscal Cliff (at least temporarily) are some of the supportive factors keeping Gold prices from simply crashing down. There is reasonable open interest in January Comex Gold Options which expire next Wednesday.

From China Daily:
“Gold is beginning to re-establish itself as part of the fabric of the financial system. In the medium term, the quantitative easing initiatives in the West and the continuing growth in the East, particularly in India and China, coupled with the seasonally strong quarter coming up in Asia, are excellent indicators for further growth in the Gold market,” said Marcus Grubb, managing director of investment at the World Gold Council.

Negotiations Suggest Budget Deal:
Concerns about resolution of the US Fiscal Cliff issue are growing in the Gold Market. Boehner and Majority Leader Eric Cantor will give House Republicans an update on the negotiations today, said a leadership aide who requested anonymity to discuss the plans. President Barack Obama has lowered his tax revenue demand by $200 billion and offered to start tax rate increases at $400,000 in income instead of $250,000, moving closer to a budget deal with House Speaker John Boehner.

Obama wants a large enough debt ceiling increase for the next two years and would accept a new inflation yardstick that would reduce Social Security cost-of- living increases. Boehner’s office rejected the offer late yesterday, and the intensifying talks could collapse. Still, a deal about halfway between the most recent offers could include $1 trillion each in tax increases and spending cuts and allow tax rates for top earners to rise in 2013.

In exchange, Obama would accept some up-front spending cuts, and other scheduled cuts would be canceled. Congress would pursue broader changes next year against the threat of tax increases and spending cuts in 2014. President Obama and Boehner are still far apart on where to draw the line on tax rates, whether a deal should include economic stimulus spending and how to address the debt limit.

Supportive Factors for Gold on declines:
Gold Bulls base their higher price expectations on the catastrophic implications of a world floating on fiat currencies. More debt solutions to already massive debt piles and deficit spending will significantly dilute the value of currencies. Western nations have an almost insurmountable debt problem that is proving all but impossible to solve, and all efforts to date have revolved around printing more and more money to avoid the monetary system from completely collapsing.

A massively growing number of citizens are now finally considering Gold as an important part of their investments. There has been a significant increase in demand in recent months because of worry about actions taken by the ECB – European Central Bank and US Federal Reserve, as the two central banks seek to counter the eurozone crisis and slow US economic growth. A huge source of Gold Demand from banks could be the change in Basel III regulations.

Gold could get promoted to Tier 1 status, meaning it would be considered a “zero-percent risk weighted item." If the Basel Committee decides to grant gold a favorable liquidity profile under its proposed Basel III framework, it will open the door for gold to compete with cash and government bonds on bank balance sheets – and provide banks with an asset that actually has the chance to appreciate.

All recent years’ data show that dips in the Gold prices are being bought and will continue to be bought by central banks around the Globe. And of course there’s China – Little is known, but this World number one Gold producer is yet the World number 2 buyer – Why? I could go on and on about why the world is turning towards buying Gold. But hasn’t it occurred to anyone on why hasn’t Gold broken into new highs, despite enough catalysts to shoot it way above $3000 also – Right now? I have repeatedly clarified this point earlier also.

Excess Factor causing Skewed Markets:
There is economic weakness everywhere and there is no easy solution to this because the problem is Excess Debt. The only way to deal with this is to somehow have a debt clean-out, which implies a very long, ugly economic period. The point here that I wish to elaborate is that we have seen a phase of Excesses in the past few years. Excess Exuberance, Excess Greed, Excess Debt, Excess Money Printing, Excess Price rises in Gold, Excess Pessimism and now Excess Hope – one leading to the other.

Excess Currency debasement may soon be followed by Excess recession or depression to complete the circle. The world suddenly realized the Investment value of Gold when in Excess debt. There were many options available then to avoid today’s situations, but Governments sought the easiest road to Instant Cure via Excess Medication. The after effects were to follow naturally. The scene today is way different. Gold may be now sold to overcome some part of debt.

Gold may also get heavily into re-cycling mode due to relatively high prices. With excess supply over demand, Gold may not rise as high as markets expect it to. With a severe need for a secure hedge against Currency debasement and sure-to-shoot Inflation amid a deep recession in the offing, and Gold already at high prices will remain out of reach for most and without the necessary Investor support, may under perform too.

With some further Price rises Gold will soon get out of reach for most of the average investors or traders who are nonetheless searching for an Inflation and currency hedge also. While Gold frequently steals the show, Silver till now has tended to be more volatile, leading the rallies as well as the dips in size. It is now a picture perfect opportunity for Silver to outperform all asset classes soon. Silver seems the BEST bet going forward – for some time.