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Setting the Tone for Gold: FOMC and the US Budget Debate

The U.S. Comex gold futures rebounded 0.47 percent to $1,701.80 on Thursday after falling 0.12 percent the day before. Week-to-date, the gold futures fell 0.53 percent. Gold fell during seven out of the past ten weeks. The S&P 500 Index and the Euro Stoxx Index both went up 0.49 percent in the past two days while the Dollar Index went up 0.75 percent and rebounded above 80.

Cautious Outlook from the ECB
The Euro Area November PMI composite shrank for the tenth month although it rose slightly to 46.5 from 45.7 in October. On Thursday, the ECB projected this economic weakness would continue into the first half of 2013. They expect the economy to shrink 0.5 percent in 2012 and decline 0.3 percent in 2014. The ECB also downgraded both the growth and inflation outlook. They also kept interest rates unchanged at 0.75 percent. Market interpreted that the ECB has left the door open for further interest rate cuts which may be bullish for gold price.

Goldman Sachs’ Gold Price Call and the U.S. Budget Debate
On 5 December, gold price fell due to a better than expected U.S. services ISM index data and the call by Goldman Sachs that the gold price would peak in 2013. The U.S. November non-manufacturing index, helped by the rise in autos and homebuilding, rose from 54.2 in October to 54.7 in November, beating the expectation at 53.5. This has helped the U.S. Dollar to rebound. Gold price was further hampered when Goldman Sachs expected that an improving U.S. growth outlook and the subsequent rise in real interest rates would outweigh the effect from the Fed’s further easing, causing the gold price to turn in 2013. Goldman expects gold price to be $1,800 in a year’s time and estimates an average price of $1,750 in 2014. President Obama is concerned of the risk to the U.S. businesses if the automatic $600 billion tax increases and spending cuts occurred on 31 December this year. Yet, the President is firm on his stance that the deficit reduction plan cannot work without a rise in the tax rate of the top earners. The Republicans’ package however focuses on entitlement cuts.

The FOMC Next Week
All eyes will be on the FOMC policy decision on 12 December next week. Other important events to watch will include the U.S. November non-farm payrolls on 7 December, the November Chinese industrial production data on 9 December, and the outcome of the EU Summit on 14 December for details on the banking union and the EU budget.

Robert Jilles
Sharps Pixley, London

07 Dec 2012 | Categories: Gold

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