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Bracing for Gold’s Short-term Corrections

The U.S. Comex gold futures tumbled 1.31 percent on Thursday to end at $1,645.90. Week-to-date, the gold futures have fallen 3.01 percent, trimming this year’s gain to around 5 percent. The S&P 500 index and the Euro Stoxx 50 index advanced 2.13 percent and 1.06 percent respectively this week. While the gold price has weakened, the Dollar Index has also dropped 0.42 percent this week. On the other hand, crude oil futures surged 3.92 percent week-to-date to end at $90.13 on Thursday.

U.S. and Japan data not helping gold prices
Gold price reacted negatively to the latest U.S. GDP data. Based on the third reading of the U.S. real GDP growth, the economy grew at an annual pace of 3.1 percent in Q3, faster than the economists’ estimates of 2.8 percent, and the prior reading of 2.7 percent. Residential investment grew sharply at 13.5 percent, and will likely contribute to economic growth in 2012 for the first time since 2005. The existing home sales in the U.S. rose 5.9 percent in November to reach an annual rate of 5.04 million. The market fears that a faster economic recovery will shorten the time for the Fed’s monetary stimulus. Nevertheless, the median forecast for Q4 GDP is 1.4 percent, reflecting the slow job growth and weakness in investment spending. Gold price did not get much boost from the Bank of Japan either. The BOJ expanded its asset-purchase fund to 76 trillion Yen, but kept its lending program unchanged. It did not increase the inflation target to 2 percent as Abe suggested, but will review its 1 percent inflation goal.

The correction continues
Gold has recently dropped below its 200-day moving average, which was about $1,669. According to some analysts, the price may further drop to $1,535. Jim Rogers, the commodities guru, is not surprised about the gold price correction, which has continued for about 15 to 16 months. He expects more corrections to come. In the short run, corrections are likely related to year-end tax-related selling, fund liquidations, a short-term rebound in the European confidence, and the impasse in the U.S. fiscal cliff negotiations. A low inflation and a weak growth scenario will not be favorable to gold.

Year-end data to watch
Data will be light given the upcoming Christmas holidays although the market’s anxiety towards the U.S. fiscal negotiations will remain. The market will watch the U.S. November new home sales on 27 December, and China’s December final HSBC manufacturing PMI index on 31 December.

Kelly Smith
Sharps Pixley, London

21 Dec 2012 | Categories: Gold

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