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Selling Gold for Riskier Assets

The U.S. Comex gold futures fell to a three-and-a-half-month low of $1,662 on 18 December. After falling 1.55 percent last week, the gold futures dropped another 1.55 percent this week. In contrast, risky markets such as the S&P 500 and the Euro Stoxx 50 went up 2.35 percent and 0.49 percent respectively this week. The Dollar Index fell 0.28 percent in the past two days, after falling 0.28 percent last week.

Gold vs. Risky Assets
On Tuesday, President Obama and the House Speaker Boehner appeared to have made more concessions on the U.S. fiscal cliff negotiations. Obama has revised his tax rate increases starting from an income level of $400,000. His proposal involved raising $1.2 trillion in taxes in the next 10 years while trimming $1.22 trillion in spending. Boehner will table a plan to the Republicans to raise taxes on Americans earning $1 million or more. On another note, Greece received a credit rating upgrade from the S&P from selective default to B- due to the euro-area governments’ resolve to keep Greece in the Euro. In China, the December HSBC flash manufacturing PMI index rose to 50.9 from 50.5 last month. Market participants reacted to such news by selling gold and buying risky assets such as stocks and the Euro/Dollar. As the gold price has fallen below the technical support level at around $1,680, gold priced in Euros also started to break, resulting in more technical selling of gold against Euro/Dollar.

Gold Price vs. Volume
While gold price has fallen in the past four weeks, and is having a tug-of-war with risky assets, physical demand and investment flows are still supporting gold price. With the marriage season in India in full swing going into the New Year, a rising disposable income, and a stronger Rupee, retail demand for gold and jewellery has been rising. According to Bloomberg, gold-backed ETPs holdings rose to a record of 2,631.43 metric tons as of 17 December. This will likely be the largest annual percentage gain since 2010. The Japanese Yen has continued to fall against the U.S. dollar, spurred by the landslide victory of Abe’s LDP on Sunday. The falling Yen is also signaling further monetary stimulus by the Bank of Japan, which will finish its interest rate meeting on 20 December.

Robert Jilles
Sharps Pixley, London

19 Dec 2012 | Categories: Gold

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