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Economic Fears Rise - Yet Gold Falls - What's Going On ?

With economic fears rising sharply one might expect gold to be rallying towards fresh highs - its not - gold is off 3.3% today, falling over $57 to $1724 while silver shed 6.8%. That's a 11% fall since gold hit an all time high of $1920 earlier this month. What has happened to gold's safe-haven status ? This move is counter-intuitive - gold is simply not responding to risk aversion.

Fear can best be measured by the VIX Index which measures the options volatility on S&P equities - a figure above 30 is an economic 'orange light' - while a figure above 40 (reached only 5 times in the last 40 years) suggest that the market is in a state of high dudgeon. The VIX closed yesterday at 37.32  and has just opened in Chicago in the last few minutes at 41 and was last quoted at 41.30. Stock markets are also taking the brunt
with the FTSE down 5% at 5021 and DJIA down 2.7% at 10,817 - at last count.

The financial markets are not taking a positive view of the FOMC Meeting in the US which, coupled with weak data published in both Europe and China, is leading to the belief that we are heading back into recession.

An unintended consequence of the FOMC - ironic even, is that investors have fled emerging market currencies and other asset classes to go into dollars, which rose to a six month high. The natural effect of that is not only to hamstring US manufacturing with an additional burden of a strong currency (over and above weak demand) but it also puts downward pressure on commodities which are traded in dollar-terms - gold and
indeed oil amongst them.

It would be tempting to attribute gold's fall to selling to fund margin calls in other instruments but something else might be at play.  What appears to have turned a gold sell-off into a rout is stops being triggered on COMEX with futures traders liquidating long positions. The possibility of 'official' selling cannot be excluded either.

Chartists will feel vindicated by the move with gold forming a so-called bearish 'double top' which if they are correct would take gold back to $1702.
There is a growing sense in the markets that there is a policy vacuum at the heart of governments to counter what is clearly a very difficult set of economic factors. Even those few choices open to us are unlikely to gain support amongst  rival politicians, let alone the citizens who will 'wear' those losses. The FOMC Meeting will have given those of that persuasion proof that there are no clear policies to move us out of the debt trap. The statement at the FOMC that there are significant downside risks with little to counter it is deeply depressing. The political stalemate in the US looks likely to be brought to a head again with Republicans voting against a bill which would keep the US fedral government funded beyond the end of this month - a scary thought.

Where from here ? Well by rights gold should stage a retracement but at the moment it is hard to call as we all stare at the numbers in some disbelief wondering when a floor will be reached.

Ross Norman
Sharps Pixley, London

22 Sep 2011 | Categories: Gold

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