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U.S. Fiscal Debate Hurting Equity Markets and Supporting Gold Price

After rising 0.31 percent on Wednesday, the U.S. Comex gold futures tumbled by 0.94 percent on Thursday. The S&P 500 index and the Euro Stoxx 50 index weakened by 1.54 percent and 1.26 percent respectively in the past two days. Week-to-Thursday, the gold futures has dropped almost 1 percent while the Dollar Index has remained flat at around 81.1.

As the market expected, the Euro area fell into a recession with real GDP growth dropping 0.1 percent in Q3 after falling 0.2 percent in Q2 while the September industrial production fell 2.5 percent. Germany’s and France’s real GDP rose 0.2 percent while that of Italy and Spain declined 0.2 and 0.3 percent respectively in Q3. The Japanese government also downgraded its economic outlook for four consecutive months due primarily to the weakening external outlook.

In the U.S., both the New York and Philadelphia manufacturing indices contracted in November. The unemployment claims ending the week of 10 November shot up by 78,000 due to the aftermath effect of Hurricane Sandy although real GDP growth may not be impacted in total in the next two quarters. The debate on the fiscal cliff has clearly weakened sentiments in the U.S. markets where the S&P 500 index dropped about 5 percent after the Presidential election. Last-minute brinkmanship could lead to a prolonged fiscal debate up to the U.S. debt ceiling deadline around mid-February, 2013.

The weaker gold market prices on Thursday coincided with the release of the Q3 Gold Demand report by the World Gold Council. The report showed that global gold demand dropped 11 percent year-on-year to 1,084.6 tonnes in Q3 although the high base in Q3 2011 was a result of the uncertainty surrounding the U.S. debt ceiling debate. Physical demand weakened in Q3 with investment demand, which includes ETFs, total bars and coins, dropping 16 percent year-on-year in Q3. Indian demand rose 9 percent while Chinese demand weakened 8 percent as the Chinese economy slowed. ETF demand was the bright spot within investment demand, rising 56 percent from last year. Year-to-September, the central banks continued to purchase gold at a clip of about 100 tonnes per quarter.

The important data and events to watch include Ben Bernanke’s speech in New York, the October U.S. housing starts data and the Bank of Japan interest rate meeting on 20 November as well as the EU Summit and the EU-17 November flash manufacturing PMI index on 22 November.

Kelly Smith
Sharps Pixley, London
www.sharpspixley.com

16 Nov 2012 | Categories: Gold

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