Weekly Gold & Silver Market Recap – 2/22/2013
GOLD PRICES MOVE DOWN WITH SPECULATION OF LESS STIMULUS
Gold prices ended this week in the same downward direction that it started. As the week started, Gold remained at a 6-month low following last Friday's big loss from positive economic news. At this point the yellow metal requires some pessimistic data to rebound or a heavy demand in the asset. “Gold bugs would argue that last week’s pullback has opened up the opportunity to buy the metals at cheaper prices, and that, over the long term, prices should rise,” said GFT Markets technical analyst Fawad Razaqzada. While the lower Gold price made for buying opportunities, the demand could not influence the market enough to stop the market price from falling farther. On Wednesday the United States Federal Reserve released its notes from their January meetings and it made a large impact on the Gold price. The Fed’s minutes indicated a potential halt of asset buying, which caused Gold to tumble to its lowest level since last July. Wednesday’s decline was the largest single-day drop in almost one year. QE has been instrumental in driving the Gold price up since its inception. The announcement that stimulus measures could come to an end caused Wednesday’s drastic price drop for the yellow metal as the appeal of Gold as an inflationary hedge has been temporarily cut short. “The economic data is telling us that the economy is definitely showing signs of improvement,” Vedant Mimani, a portfolio manager at Atyant Capital Management Ltd., said. To add to the lowering of Gold’s market price, “A lot of sellers came in after Gold broke below the psychological $1,600 mark, and concern about the end of stimulus is adding further pressure,” added Mimani. The Gold price is still fragile today, even after gaining some ground overnight when European stocks recovered from two-week lows. Gold fell to its seven month lows in part on worries that the Fed would slow its bond buying program. This program typically supports a strong Gold price. Mitsui Precious Metals analyst David Jollie said, “There's no doubt that the resolute sense of bullishness we've had in Gold over the last couple of years has weakened substantially. While there are still plenty of people who are bullish long-term, short-term sentiment is understandably more negative.” The global monetary policy of recent years has encouraged investors to seek refuge in Gold as a safe haven. We just have to wait and see how long it takes for investor confidence to return.
REASON FOR GOLDEN REBOUND
While the Gold and Silver prices reach 6 month lows, there are many reasons investors are still positive on the metal’s long term value. There is much discussion around the beginning of the automatic spending cuts that would come with the sequester in the U.S. “There is no real negotiation between Democrats and Republicans on a compromise and the beginning of the sequester on March 1, therefore seems to be inevitable,” strategists at R.J. O’Brien wrote. They continued, “Once the spending cuts hit, Republicans and Democrats will assess the extent of the stock market damage and any public outcry at defense industry layoffs, furloughs of government workers, and cuts in services for services such as meat inspections and flight controllers.” In the past, economic uncertainty has been a boon to the Gold price. One of the main players in the global Gold market is China. Last week, the Chinese markets were closed for their annual Lunar New Year holiday. Now that the market is back in session and Gold prices have dipped, there is good reason to believe physical buying will be picking up. Frederic Panizzutti, senior vice president at MKS Finance Geneva, explained, “What can and will probably make a dent in the recent downward direction is the opportunistical buying to take advantage of the sharp recent price decline. All factors that led Gold toward higher levels over the last three years are still intact and we would see no reason why the medium term trend would have changed.” Ole Hansen of Saxo Bank added it may take some time to see the true affect of the physical buying of Gold. “Actual confirmation will more be highlighted when we see monthly data on Hong Kong exports into China,” Hansen said. This week’s movements in the metals market have been based on speculation on the end of monetary easing in the U.S. However, there seems to be a difference in opinions between the reports and the members of the Federal Reserve. St. Louis Fed President James Bullard told CNBC Friday that the Federal Reserve’s “very aggressive” easy money policy is going to stay that way. He is even quoted as saying, “This is a monetary policy that packs a punch.” Bullard is a voting member of the Federal Open Market Committee (FOMC) and his quote raises more questions about the direction of the Fed and its effect on the metals market.
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