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Gold Reasserting Itself as the Fear Index?

The U.S. Comex gold futures bucked the trend of the broader riskier markets and surged 1 percent to $1,726 on Thursday. Gold futures traded further up at $1,735 during Asia open on Friday. The S&P 500 and the Euro Stoxx 50 Index fell 3.56 percent and 2.24 percent in the past two days while the CRB Commodities index dropped 1.78 percent. The Euro/Dollar fell 0.69 percent this week to 1.2747 after falling 0.8 percent last week. Week-to-Thursday, gold has risen 3 percent while the VIX spot rose 5 percent.

Safe-haven bids for gold have re-appeared as the markets immediately turned their attention to the fiscal cliff and the European debt crises after the U.S. election uncertainty has been removed. What exactly is the fiscal cliff? It is a term first used by Ben Bernanke in his speech to the Congress in February 2012, referring to the enacted legislation causing an automatic spending cuts and tax hikes on 31 December, 2012 of about $7 trillions over the next 10 years and about $600 billion in 2013. What’s to fear? The politics in the U.S. remains a gridlock after the election, and if no action is taken, the U.S. Congressional Budget Office expects a U.S. recession in the first half of 2013. In the two months around the time the deficit-reduction deal was signed in 2011, gold price surged around 8 percent while the S&P 500 index plunged about 14 percent.

In Europe, the ECB kept its benchmark rate at 0.75 percent on Thursday though the ECB warns of lowering its economic forecast of the Euro zone next month as the economic outlook, including that of Germany, is deteriorating. Spain has still not asked for ECB to purchase its bonds while the Euro area finance ministers will not likely to make a final decision to release the Euro 31.5 billion of aid to Greece until probably 26 November.

The GFMS expects that China’s gold demand will rise 1 percent to 860 tonnes in 2012, overtaking India to become the largest gold consumer in the world. Although overall economic growth and therefore gold demand slowed in 2012 compared to 2011, gold purchases especially in jewelleries in the third and forth-tier cities in China will support overall consumption.

Upcoming data and events to watch include the Chinese October industrial production and fixed asset investment growth on 8 November, the Chinese October exports and imports growth on 9 November, the Euro area finance ministers meeting on 12 November and the FOMC meeting minutes and Germany’s Q3 GDP on 14 November.

Robert Jilles
Sharps Pixley, London

09 Nov 2012 | Categories: Gold, Euro

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